Abstract
This paper deals with the article on full absorption costing and marginal costing systems. Lakmal (2014) highlights the advantages and downsides of the two approaches and reveals the most effective ways to use the two systems. Importantly, the author notes that it is beneficial to use both approaches alongside activity-based costing. The article is very valuable as it helps understand the essence of the full absorption system through its comparison with another approach.
Main Body
The paper in question deals with full absorption costing as opposed to marginal costing. Lakmal (2014) argues that full absorption costing has advantages and certain shortcomings. The author also provides an analysis of the literature on absorption costing. Lakmal (2014, p. 7) argues that both approaches can be used as they “could yield different profit (surplus) figures because they differ in stock valuation”.
The author first provides a detailed literature review on costing systems. It is noted that the system is “as old as cost accounting” (Lakmal, 2014, p. 4). The system is particularly important in managerial planning. Lakmal (2014) provides a definition of full (or total) absorption costs and marginal costing.
Thus, in simple terms, marginal costing is the way to calculate the cost of a unit of goods production or service. Lakmal (2014) notes that this approach can be helpful with short-term decisions (for example, accepting a special order). Nonetheless, it can be ineffective when developing managerial plans. At the same time, full absorption costing is the cost of final products (including costs of materials, salaries, money paid to partners and so on).
The researcher identifies two basic types of full absorption costing, job order costing and process costing (Lakmal, 2014). The former cost focuses on salaries while the latter concentrates on costs of services. According to Lakmal (2014), this approach can be rather ineffective when making short-term decisions. However, it is more applicable when planning. The author also notes that the two approaches have specific downsides and, hence, a new approach (activity-based costing) has been introduced.
As has been mentioned above, Lakmal (2014) provides an analysis of the literature available on the matter. It is clear that people’s attitude towards the two approaches has differed throughout the decades. At present, full absorption costing is more widespread and accounting managers tend to use this system.
However, the other approach is also used to achieve specific goals. At the same time, activity-based costing is becoming more popular. The author stresses that it is not effective to use only one system as accounting managers tend to utilize different systems when dealing with different issues or goals. Lakmal (2014) also adds that the modern business world is very diverse and it changes rapidly. Hence, managers have to take into account numerous details and utilize different systems to enable their companies to be competitive.
The present article is a good source that can be seen as the first step in the research on full absorption costing. The author uses simple terms and explains the essence of two competing approaches. The article provides information on the use of the two approaches and reveals their benefits and shortcomings.
The article can help people understand what full absorption costing is and how it can (or should) be used. It is very useful that the author does not simply tell about the full absorption costing but compares this system with the competing approach. This method helps understand the peculiarities of full absorption costing.
Reference List
Lakmal, D. (2014). Cost analysis for decision making and control: Marginal costing versus absorption costing. Social Science Research Network, 1-10.