Question

Explain the principles of full costing and activity based costing and comment on the relative advantages and limitations of each approach?

Answer 1

Solution:

Activity based costing:

Action based costing (ABC) is an approach for all the more accurately assigning overhead to those things that really utilize it. The framework can be utilized for the focused on decrease of overhead expenses. ABC works best in complex conditions, where there are numerous machines and items, and tangled procedures that are difficult to deal with. Then again, it is of less use in a streamlined situation where generation forms are contracted.

Advantages of Activity Based Costing:

1) Accuracy – Activity Based Costing acquire more precision the calculation of expense of items and administrations in examination of customary costing framework.

2) Helpful in basic leadership by precisely processing the expense of items and administrations.

3) ABC costing serves to indentify the open doors for development and decreases of expenses.

4) ABC costing dispenses with the non esteem including exercises.

5) Help to circulation overheads based on exercises.

limitations of Activity Based Costing:

1) Complex System - Activity Based Costing is an intricate framework and requires parcel of records and exhausting counts.

2) Not useful for little association.

3) Sometimes it is hard to credit expenses to single exercises as a few costs bolster a few

exercises.

4) Trained experts are required who are restricted in number.

5) This framework will be fruitful if there is an aggregate help from the best administration.

6) Substantial venture of time and cash is required for the usage of this framework.

Full costing :

Full costing is utilized to decide the total and whole expense of something. The idea is most generally utilized for account the full expense of stock in the budget summaries. This kind of costing is required for money related detailing under a few bookkeeping structures, for example, Generally Accepted Accounting Principles and International Financial Reporting Standards, and for money charge revealing.

Advantages of Absorption Costing:

(I) Consideration of Fixed Costs:

Ingestion costing properly perceives the significance of incorporating settled creation costs in item cost assurance and in deciding an appropriate estimating arrangement. Supporters of assimilation costing contend that settled generation costs are the same amount of utilized in the creation of merchandise and ventures as the variable generation costs.

The valuing dependent on retention costing likewise guarantees that all expenses are secured. The evaluating decided as far as just factor costs (as is supported in factor costing) may, over the long haul, result in a commitment edge neglecting to take care of the settled expenses. It is imperative, be that as it may, that deals are equivalent to or surpass the planned generation level generally all settled assembling costs won't be secured and will be under-retained.

(ii) Seasonal Sales:

In a circumstance where creation is done to have deals in future (e.g., regular deals), assimilation costing will indicate right benefit estimation than the variable costing. In such a case, under factor costing, deals will be zero however all settled costs will be appeared as a cost in a similar bookkeeping period. The outcome is that misfortunes will be accounted for amid out of season periods and extensive benefits will be accounted for in the periods when the merchandise are sold.

Despite what might be expected in retention costing, settled assembling overheads are incorporated into shutting stock valuation and are conceded and recorded as a cost just in the period in which merchandise are sold. Misfortunes, along these lines, won't be accounted for in retention costing when deals are nil or very low and stocks are being developed. In this manner, retention costing will report right benefit circumstance than variable costing.

(iii) Conformity with Accrual and Matching Concepts:

Retention costing acclimates with gathering and coordinating bookkeeping ideas which requires coordinating expenses with income for a specific bookkeeping period.

(iv) External Reporting:

Retention costing has been perceived to prepare outer reports and for stock valuation reason. For example, FASB (USA), ASC (UK), ASB (India) have suggested the utilization of assimilation costing for these reasons.

(v) No Need to Separate Costs as Fixed and Variable:

Assimilation costing keeps away from the detachment of expenses into settled and variable components which can't be effectively and precisely done.

(vi) Relevance of Under-assimilation and Over-ingestion:

The introduction of under-assimilation and over-ingestion of manufacturing plant overheads in retention costing reveals wasteful or effective usage of generation assets which is beyond the realm of imagination in factor costing.

(vii) Accountability of Departmental Managers:

The designation and distribution of settled industrial facility overheads to cost focuses or offices makes supervisors progressively mindful and in charge of the expenses and administrations gave to their focuses/offices.

Limitations of Absorption Costing:

(I) Fixed Costs are Period Costs:

Numerous bookkeepers contend that settled costs, regardless of whether identified with assembling or to moving and organization, are period costs which create no future advantages and in this manner, ought not be incorporated into the expense of the item and stock.

(ii) Apportionment of Overhead Costs:

The legitimacy of item costs decided under absorp­tion costing relies on the propriety of distribution of overhead expenses in a sensibly right way. However, by and by, numerous overhead expenses are allocated by utilizing self-assertive strategies. The subsequent costs figures, along these lines, are suspicious and whenever incorporated into the expenses of items can make the item costs erroneous and questionable.

(iii) Not Useful in Decision Making:

Assimilation costing isn't useful to the executives in basic leadership. Different sorts of administrative issues, for example, choice of creation volume and ideal limit usage, determination of item blend, regardless of whether to purchase or fabricate, assessment of execution, selection of choices can be unraveled just with the assistance of variable costing investigation.

(iv) Not Useful in Cost Control:

Assimilation costing isn't useful responsible for expenses and arranging and control work. It isn't valuable in settling the duty regarding incurrence of expenses. It isn't down to earth to consider a chief responsible for expenses over which he has no control. When he discovers that he can't control some portion of the expenses with which he is charged, his awareness of other's expectations for controlling his immediate expense by one way or another appears to debilitate. Assigning aberrant expenses additionally mutilates aftereffects of tasks other than confounding control and basic leadership. Twisting happens in light of the fact that diverse bases of division deliver distinctive distribution to items and influence diverse outcomes.

(v) Inflated, Not Real, Profit:

Assimilation costing causes a director to increments working pay in an explicit periods by expanding the generation, regardless of whether there is no client interest for the extra creation. At the point when ingestion costing strategy is utilized, creation settled generation overheads are charged to items and are incorporated into item costs.

Therefore, the end stocks are esteemed on aggregate expense (counting settled overheads) premise. The net impact is that the charge of settled overheads to P/L account gets lessened, if the end stock is more prominent than the opening stock. This circumstance has the impact of expanding the benefit for the period. One inspiration could be an administrator's reward plan that depends on detailed working pay.

Pundits of retention costing allude to this wonder as one that makes illusionary or ghost benefits. Apparition benefits are brief retention costing benefits caused by creating more stock than is sold. At the point when deals increment to dispose of the recently created stock, the apparition benefits vanish.

The bothersome impact of delivering for stock might be sizeable and they can emerge in a few different ways.