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Marginal and Absorption Costing – Differences

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

Marginal and Absorption Costing Differences **COST CLASSIFICATION:** Under adsorption costing, costs are classified on functional basis i.e. Production, Administration, Selling & Distribution, Research, Development etc. Under marginal costing, costs are classified as either Fixed or Variable. **PRODUCT v/s PERIOD COSTS:** Under adsorption costing, fixed costs are treated as product costs. Under marginal costing, fixed costs are treated as period costs. They are written off in the period in which they are incurred. **STOCK VALUATION:** Under adsorption costing, the fix overheads (fixed production overheads under financial accounting system and fixed production and administration overheads under cost accounting system) are charged to the output. To the extent, the output remains unsold i.e. closing stock; its valuation would include not only the variable production cost but also the fixed overheads. This implies that part of the current period's fixed cost is effectively converted into an asset and carried forward and charged to the next period. Likewise the opening stock valuation also includes the fixed overheads of previous period. Unlike that, under marginal costing, the fixed overheads are all treated as period cost items and are charged to the period rather than the output. Accordingly, the stock valuation includes only the variable factory or production cost and not the fixed charge. **PROFIT MANIPULATION:** Profit figure can be manipulated by showing higher stocks under absorption costing. No such manipulation is possible under marginal costing. **VARIANCE CALCULATION:** In variance reporting, Fixed Overheads expenditure variance only can be computed under marginal costing. There is no volume variance since fixed overheads are non “absorbed”. In variance reporting Fixed Overheads Expenditure and Volume variance, variance can be computed under absorption costing. Volume variance can also be sub-classified into Capacity, Efficiency and Calendar variances. **OVER /UNDER ABSORPTION:** If the spent amount is different from absorbed amount then, there will be over/under absorption under absorption costing. Since all fixed costs are written off in the period in which they are incurred there is no possibility of over/under absorption. **APPLICATION:** Absorption costing technique is used for external reporting purposes

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Data?1494421730 answered

Dear Friend > Marginal and Absorption Costing Differences 1. COST CLASSIFICATION: Under adsorption costing, costs are classified on functional basis i.e. Production, Administration, Selling & Distribution, Research, Development etc. Under marginal costing, costs are classified as either Fixed or Variable. 2. PRODUCT v/s PERIOD COSTS: Under adsorption costing, fixed costs are treated as product costs. Under marginal costing, fixed costs are treated as period costs. They are written off in the period in which they are incurred. 3. STOCK VALUATION: Under adsorption costing, the fix overheads (fixed production overheads under financial accounting system and fixed production and administration overheads under cost accounting system) are charged to the output. To the extent, the output remains unsold i.e. closing stock; its valuation would include not only the variable production cost but also the fixed overheads. This implies that part of the current period's fixed cost is effectively converted into an asset and carried forward and charged to the next period. Likewise the opening stock valuation also includes the fixed overheads of previous period. Unlike that, under marginal costing, the fixed overheads are all treated as period cost items and are charged to the period rather than the output. Accordingly, the stock valuation includes only the variable factory or production cost and not the fixed charge. 4. PROFIT MANIPULATION: Profit figure can be manipulated by showing higher stocks under absorption costing. No such manipulation is possible under marginal costing. 5. VARIANCE CALCULATION: In variance reporting, Fixed Overheads expenditure variance only can be computed under marginal costing. There is no volume variance since fixed overheads are non “absorbed”. In variance reporting Fixed Overheads Expenditure and Volume variance, variance can be computed under absorption costing. Volume variance can also be sub-classified into Capacity, Efficiency and Calendar variances. 6. OVER /UNDER ABSORPTION: If the spent amount is different from absorbed amount then, there will be over/under absorption under absorption costing. Since all fixed costs are written off in the period in which they are incurred there is no possibility of over/under absorption. 7. APPLICATION: Absorption costing technique is used for external reporting purposes. It distorts decision- making. Marginal costing technique is used for internal reporting purposes. It aids in decision- making. Thanks

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