Absorption Costing v/s Marginal Costing - Cost Management B Com Notes | EduRev

Cost Management

B Com : Absorption Costing v/s Marginal Costing - Cost Management B Com Notes | EduRev

The document Absorption Costing v/s Marginal Costing - Cost Management B Com Notes | EduRev is a part of the B Com Course Cost Management.
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There are two alternative approaches for the valuation of inventory; they are Marginal Costing and Absorption Costing. In marginal costing, marginal cost is determined by bifurcating fixed cost and variable cost. Only variable costs are charged to operation, whereas the fixed cost are excluded from it and are charged to profit and loss account for the period.

Converselty, Absorption costing or otherwise known as full costing, is a costing technique in which all costs, whether fixed or variable are absorbed by the total units produced. It is aminly used for reporting purposes, i.e. for financial and tax reporting. There are many who say marginal costing is better, while others prefer absorption costing. So, one should know the difference between marginal costing and absorption costing to reach at conclusion, as to which one to be preferred over the other.

Comparison Chart

BASIS FOR COMPARISON

MARGINAL COSTING

ABSORPTION COSTING

Meaning

A decision making technique for ascertaining the total cost of production is known as Marginal Costing.

Apportionment of total costs to the cost center in order to determine the total cost of production is known as Absorption Costing.

Cost Recognition

The variable cost is considered as product cost while fixed cost is considered as period costs.

Both fixed and variable cost is considered as product cost.

Classification of Overheads

Fixed and Variable

Production, Administration and Selling & Distribution

Profitability

Profitability is measured by Profit Volume Ratio.

Due to the inclusion of fixed cost, profitability gets affected.

Cost per unit

Variances in the opening and closing stock does not influence the cost per unit of output.

Variances in the opening and closing stock affects the cost per unit.

Highlights

Contribution per unit

Net Profit per unit

Cost data

Presented to outline total contribution of each product.

Presented in conventional way.

 

Key Differences Between Marginal Costing and Absorption Costing

The following are the major differences between marginal costing and absorption costing.

  1. The costing method in which variable cost is apportioned exclusively, to the products is known as Marginal Costing. Absorption Costing is a costing system in which all the costs are absorbed and apportioned to products.

  2. In Marginal Costing, Product related costs will include only variable cost while in the case of Absorption costing, fixed cost is also included in product related cost apart from variable cost.

  3. Marginal Costing divides overheads into two broad categories, i.e. Fixed Overheads and Variable Overheads. Look at the other term Absorption costing, which classifies overheads in the following three categories Production, Administration and Selling & Distribution.

  4. In marginal costing profit can be ascertained through the help of Profit Volume Ratio [(Contribution / Sales) * 100]. On the other hand, Net Profit shows the profit in case of Absorption Costing.

  5. In Marginal Costing variances in the opening and closing stock will not influence the per unit cost. Unlike Absorption Costing, where the variances between the stock at the beginning and the end will show its effect by increasing/decreasing per unit cost.

  6. In marginal costing, the cost data is presented to outline total cost of each product. On the contrary, in absorption costing, the cost data is presented in traditional way, net profit of each product is ascertained after deducting fixed cost along with their variable cost.

Conclusion

You can see the differences in the profits generated in the income statement by the two costing system because the absorption costing procedure, apportions fixed cost of production to the output whereas the marginal costing system ignores it. Moreover, the absorption costing is based on budgeted levels of output, but because fixed overheads remain same irrespective of the levels of output, it creates variances in the actual and the budgeted levels at the time of its recovery.

 

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