BP Executive Summary

BP Executive Summary

This report will present an explanation of four main costing systems;

it will describe the advantages and the disadvantages of marginal

costing, absorption costing, process costing and service costing. It

will also reveal whether these costing systems are suited to the

company BP.

Marginal costing is suitable for BP to use internally to calculate the

number of units needed to be sold to break even. Marginal costing is

appropriate for BP because it has many variable costs such as the

products sold in stations and the transportation of the petrol; these

are all dependent on the level of activity.

Absorption costing

Comparison of marginal and absorption

Process costing / Joint and by-product costing

Service costing

Marginal costing

In product/service costing, a marginal costing system focuses on the

behavioural, rather than the functional, characteristics of costs. It

concentrates on separating costs into variable elements (where the

cost per unit remains the same with total cost varying in proportion

to activity) and fixed elements (where the total cost remains the same

in each period regardless of the level of activity). Whilst this is

not easily achieved with accuracy, and is an oversimplification of

reality, marginal costing information can be very useful for

short-term planning, control and decision-making, especially in a

multi-product business.

In a marginal costing system, sales less variable costs (regardless of

function) measures the contribution that individual products/services

make towards the total fixed costs incurred by the business. The fixed

costs (regardless of ...

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...in a near

gaseous state when produced and volume levels vary; this can be

accounted for using process costing.

In all probability BP would have work in progress to carry forward to

the next month, and these incomplete units of production can be

valuated using the concept of equivalent units.

When BP refines their oil, approximately 45% of the oil input is

turned into petrol. Innumerable other products are made from chemicals

attained through refinement such as tires, cassette film, cosmetics

and wax products. BP sells these chemicals to companies as

by-products. By products are secondary products made by a firm that

would usually be scrap but do have a useful function and can therefore

be sold. By-product costing is essential to BP as it is the only

costing technique to accommodate for these types of products.