Costing Methods Essay

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The purpose of cost allocation is to identify and correctly allocate costs associated with a job, product, or service. The main uses of cost allocation are to facilitate decision-making regarding costs, justify prices charged for products and services, cost control, and for optimal utilization of resources. There are several methods used for cost allocation, depending on the type of product or service offer by the company.

Compare and Contrast Uses of Variable and Absorption Costing knowing that absorption costing takes into account all related cost associated with manufacturing the product while variable costing takes into account only the cost of direct variables associated with manufacturing the product, one must look at the uses of each type of cost allocation. Absorption costing because of its all-inclusive nature, is used for such things as income tax reporting and for generating reports to be used by external financial investors. In contrast, variable costing is used for CVP analysis (Break Even analysis) and therefore lends its uses more to managerial decision making. Absorption costing because it does not distinguish between fixed and variable cost cannot be used for CVP analysis.

In today’s economical environment organizations are faced with strenuous conditions that directly affect their operations. Organizations are expected to provide a quality product or service under a tight budget and still be profitable. The costs related to providing this

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