Question

Do you prefer absorption approach or contribution approach? Explain your reasons. Are you in favor of fair value or historical cost? Explain your reasons.

Answer 1

First one)

Absorption approach Vs contribution approach

✓Absorption costing approach reflects on the points like getting net profit through gross profit , by maintaining seperate cost for each production and non production cost but no contribution margin concept here,

✓Contribution approach or marginal approach reflects on variable cost and fixed cost seperately and which will further helpful in making decisions not only in getting correct profit and also in make or buy decisions etc.,

Hence am personally prefer to go with contribution margin approach in the light of above stated characteristics of each one of them.

Second one)

fair value Vs historical value;

Both have their own advantage in respective to the situation, but most of the times I will prefer to go with fair value as ;

✓historical value;

When transactions are recorded at their book value this could be said as historical value representation of the aspects undertaken in an organisation.

Under this in respective to Accounting, most of the assets particularly fixed assets under balance sheet recorded at historical cost, hence it does not reflect current market value (fair value), which further leads to inappropriate presentation of financial statements., where as

✓Fair value will overcome above stated in respective to know the true and fair value of financial statements for Auditing purpose, and for taxation purpose along side of the knowing true profit and fair representation of the organisation performance, at the end ultimately to report to their stakeholders.

One thing is clear that fair value stands in better position while comparing with historical cost.