CIMA Official Learning System - Performance Operations Essay

CIMA Official Learning System - Performance Operations - Essay modellingSince all cheek produce more than one output and the overhead cost are incurred together and thus the allocation, appropriation and absorption of these overhead costs have to be done most justly. Allocation allocates the overhead costs to the cost centres or units from where these costs are incurred. Appropriation is done on both levels. On the primary level, appropriation is done by dividing overhead costs to both product and service centres on an equal basis. On the secondary level, overhead costs are distributed on arbitrary bases, depending upon either time or usage. Absorption is the absorption of overhead costs to the production cost. To do this, absorption place is determined using the following formulaOverhead Recovery Rate = Overhead Costs/ Unit ChoseThe advantage of full cost approach is that it is comparatively simple to use this approach if the firm can account for its costs easily. This approac h also brings stability to the pricing system, thereby allowing the firm to justify their prices to the consumers. integral costs approach also makes it easier to understand the pricing st pasturegy of their competitors. Under the full cost approach, the firm can expect a reasonable rate of recovery for its products. However, there are certain disadvantages of the full cost approach.... However, there are certain disadvantages of the full cost approach. The full cost approach does non allow for the adjustment of prices according to the changing demands and competition and thus may result in increased prices of the products against the competition. The full cost approach also does non allow the organization to adapt its pricing structure to prevent loss. This is because the volume of production of the products is not flexible and thus when demand goes down, the volume cannot be befittingly adjusted. The treatment of costs in the full cost approach is also standardized and thus do not allow for the differentiation between germane(predicate) and irrelevant costs (Lal, 2008) Marginal Costing Approach Marginal Costing has been defined by I.C.M.A London as the ascertainment of leewayal costs and of the effect on profits of changes in the volume or the type of output by differentiating between fixed costs and unsettled costs (Murthy and Gurusamy, 2009). Marginal Costing allows the organization to write of its fixed costs in the profit or loss account while using the variable cost to determine the profit margin for the product. The Profit in marginal costing is determined by subtracting the variable and fixed costs from the selling price of the product. By differentiating between fixed and variable costs, marginal costing allows the organization to effectively decide the feasibility of the product by studying the current manufacturing costs. Since the costs are variable, the selling price of the product can also be adjusted to meet the pricing demands of the mar ket. Marginal Costing Approach basically allows flexibility in the management decision, including the make-buy decision, the sales miscellany and the method of product to be used. Marginal Costing is more