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Absorption Costing vs Marginal Costing - Marginal Costing, Cost Management Video Lecture | Cost Management - B Com
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FAQs on Absorption Costing vs Marginal Costing - Marginal Costing, Cost Management Video Lecture - Cost Management - B Com
| 1. What is the difference between absorption costing and marginal costing? |  |
Absorption costing is a method of cost allocation that assigns both fixed and variable costs to products, while marginal costing only allocates variable costs. Absorption costing includes all production costs, such as direct materials, direct labor, and overhead, while marginal costing only considers variable costs directly related to production.
| 2. How does absorption costing affect inventory valuation? | |
Absorption costing includes fixed manufacturing overhead costs in the inventory valuation, which means that these costs are carried forward and spread across the units produced. This can result in higher inventory values compared to marginal costing, where fixed overhead costs are not included in the valuation.
| 3. What is the impact of absorption costing on profit determination? | |
Absorption costing takes into account both fixed and variable costs when determining profit. As a result, profit under absorption costing is influenced by the level of production and sales. On the other hand, marginal costing only considers variable costs when calculating profit, making it less sensitive to changes in production volume.
| 4. Which costing method is better for decision-making purposes? | |
The choice between absorption costing and marginal costing for decision-making depends on the specific circumstances. Marginal costing provides a clearer picture of the incremental cost of producing one additional unit and is useful in short-term decision-making scenarios. Absorption costing, on the other hand, may be preferred for long-term decisions as it incorporates fixed costs that are necessary for long-term planning and pricing decisions.
| 5. How does absorption costing affect pricing decisions? | |
Absorption costing includes fixed overhead costs in the product cost, which means that these costs need to be recovered through pricing. This can lead to higher product prices compared to using marginal costing, which only considers variable costs. Therefore, when using absorption costing, pricing decisions need to take into account not only the variable costs but also the fixed overhead costs allocated to each unit.
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Nov 22, 2024 Last updated |
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