Costing Definitions

Question 1

Marginal Costing

Answer 1

A technique that focuses on variable costs and contribution to fixed costs and profits.
It is primarily used for short term decision making. (One off orders).

Question 2

Absorption Costing

Answer 2

Focuses on overheads and full cost recovery through the apportionment of overheads to production cost centres on some equitable basis, and the calculation of OAR for cost units.

Question 3

Activity Based Costing (ABC)

Answer 3

A development of absorption costing and focuses on overheads and full cost recovery.
Arguably more accurate as it focuses on cost drivers and avoids splitting overheads between cost centres.

Question 4

Standard Costing

Answer 4

Based on budgeted costs / revenues that should be achievable assuming reasonable levels of efficiency.
It compares actual results with budgeted figures to identify efficiency related variances.