Differences between Absorption costing & Marginal Costing

Marginal Costing, also known as Variable Costing, is a costing method whereby decisions can be taken regarding the ascertainment of total cost or the determination of fixed and variable cost in order to find out the best process

Hello DIFFERENCE BETWEEN ABSORPTION COSTING AND MARGINAL COSTING Marginal costing calculates the cost to be incurred when an additional unit is produced. Prime cost, which includes direct material, direct labour, direct expenses, and variable overheads are the main components of marginal costing. Contribution is a concept developed along with marginal costing. Contribution is the net sales revenue to the variable cost. Under marginal costing methods, fixed costs are not taken into account based on the argument that fixed cost like factory rent, utilities, amortization, etc. are to be incurred, whether the production is done or not. In marginal costing, fixed cost are treated as period cost. Often managers require marginal costing to make decisions as it contains costs that vary with the number of unit produced. Marginal costing is also known as ‘variable costing’ and ‘direct costing’. Absorption Costing Under Absorption costing method, not only the variable costs, but fixed costs also absorbed by the product. Most accounting principles require absorption costing for the purpose of external reporting. This method is always used to prepare financial statements. Adsorption costing is used to calculate profit and stock valuation in the financial statement. As stock cannot be undervalued in this method, Inland Revenue requires this costing. Fixed costs are taken into account on the assumption that they must be recovered. The terms ‘Full absorption costing’ and ‘Full costing’ also denote the absorption costing.

Under Absorption costing method, not only the variable costs, but fixed costs also absorbed by the product. Most accounting principles require absorption costing for the purpose of external reporting. This method is always used to prepare financial statements. Adsorption costing is used to calculate profit and stock valuation in the financial statement. As stock cannot be undervalued in this method, Inland Revenue requires this costing. Fixed costs are taken into account on the assumption that they must be recovered. The terms ‘Full absorption costing’ and ‘Full costing’ also denote the absorption costing.