Question

Needs to give a conclusion summarizing the topics discuss about

budgetary control and standard costing

Marginal costing and Absorption costing

Break Even analysis

. (approximately 500 words)

Answer 1

Standard Costing is a cost accounting system, in which performance is measured by comparing the actual and standard costs and Budgetary Control is a control system in which actual and budgeted results are compared continuously in order to get the desired result.

Standard Costing is limited to, cost data, but the Budgetary Control is related to cost as well as economic data of the enterprise.

standard costing is a unit concept but budgetary control is a total concept.

Standard Costing has a restricted scope, limited to production costs only, whereas Budgetary Control, has a comparatively bigger scope as it covers all the operations of the whole organization.

In Standard Costing variances are revealed and reported however in budgetary control, as the control is being exercised at the same time, the variances are not disclosed.

In Standard Costing the comparison is made between actual cost and standard cost of actual output. On the other hand, in Budgetary Control the comparison is made between the actual and budgeted performance.

Standard costs do not change due to short-term changes in the conditions, but budgeted costs may change.

Standard Costing applies to manufacture concerns. In contrast to Budgetary Control, which will apply to all the organizations.

Marginal costing applies only those costs to inventory that were incurred when each individual unit was produced, while absorption costing applies all production costs to all units produced. This results in the following differences between the two methods

Cost application. Only the variable cost is applied to inventory under marginal costing, while fixed overhead costs are also applied under absorption costing.

Profitability. The profitability of each individual sale will appear to be higher under marginal costing, while profitability will appear to be lower under absorption costing.

Measurement. The measurement of profits under marginal costing uses the contribution margin (which excludes applied overhead), while the gross margin (which includes applied overhead) is used under absorption costing.

Overhead costs are charged to expense in the period under marginal costing, whereas they are applied to products under the absorption costing method (which may defer expense recognition to a later period).

An additional difference is that absorption costing is required by the applicable accounting frameworks for financial reporting purposes, so that factory overhead will be included in the inventory asset. Marginal costing is not allowed for financial reporting purposes, so its use is restricted to internal management reports.

Break-even analysis

Break-even analysis is a financial tool that helps us to determine at what stage our company, or a new service or a product, will be profitable. In other words, it’s a financial calculation for determining the number of products or services a company should sell to cover its costs (especially fixed costs). Break-even is a situation where you are neither making money nor losing money, but all your costs have been covered.

Break-even analysis is very useful in studying the relation between the variable cost, fixed cost and revenue. Generally, a company with low fixed costs will have a low break-even point of sale.