While pursuing a master’s degree in marketing students are required to do lots of practical studies. This gives them an in-depth knowledge of topic and subject as well as makes them understand the real-world situation. Assignment writing is also the part of course and students are required to prepare many assignments on a range of topics all through the course.

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Here is a sample assignment was written on the topic ‘differences between activity-based costing vs. absorption costing for decision making

Cost is an important factor within any organization and it is the factor that helps companies to plan their strategies, to make financially sound decisions. And when it comes to evaluating business activities, two types of costing methods are involved. These are

• Activity-based costing
• Absorption costing.

It is important to learn the difference between both costing methods. Let’s have a look at the same

Activity-based costing

The activity-based costing is also called ABC. This is an accounting method that identifies activities of the organization and assigns costs to different units that the company produces on the basis of the number of activities each unit has used. This way of costing at first checks the purpose as well as the cost of all activities executed by a company and then gives a proportionate cost to each unit produced on the basis of how much activity has been consuming by those.

You can better understand this by an e.g. Suppose a company spends the amount of $20,000 on equipment setup every year. Now, in the activity-based costing, the company would try to assign a part of the spent amount to each of the units it is producing produces. However, assigning a portion of the amount to every unit it produces is not as simple as dividing the $20,000 by the units number it has produced. Instead, before assigning the amount, the company has to find out which products it has produced has utilized which equipment the maximum, and after that assign cost to each unit on the basis of independent consumption of that usage.

Absorption Costing

This costing is called full costing. In this accounting method organization considers all types of manufacturing costs are used by units or products. In this costing, the individual unit produced cost includes labor, direct materials as well as the cost of both fixed and variable manufacturing overhead. The costs involved in it are not recorded as expenses that the company made in a month, but it is recognized as assets and considered as inventory till the produced units are sold. Once the goods are sold, units are charged as the cost of goods sold by the company. This costing is needed for income tax and financial reporting purposes.

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