CIPS Exam L4M5 Topic 10 Question 5 Discussion

There are 3 major costing methods:

Marginal costing

* Uses marginal cost of producing addition units

* Uses variable cost to derived a unit cost (does not include fixed cost)

* Fixed cost treated as a 'period cost' and deducted, as a total amount, from total contribution to profit for the period, in the firm's profit and loss account

Absorption costing

* Calculates total cost of producing product

* In addition to variable cost, a fair proportion of fixed cost is allocated to (absorbed) each unit of output, as a fixed cost per unit

Activity based costing

* Similar to absorption costing but with fixed cost allocated to products on the basis of the cost of activities used in producing them

LO 2, AC 2.1