Marginal costing Vs Absorption Costing
Absorption Costing
- All costs fixed and variable are included for ascertaining the cost
- Different unit costs are obtained at different levels of output because of fixed expenses remaining same
- Difference between sales and total cost is profit
- A portion of fixed cost is carried forward to the next Period because closing stock of working progress and finished goods is valued at cost of Production which is inclusive of fixed cost. In this way cost of a Particular period cost should be charged to the period concerned and should not be carried over to the next period
- The apportionment of fixed expenses on an particular Y basis gives rise to over or under absorption of overheads which ultimately makes the product – cost inaccurable and unreliable.
- Absorption costing is not very helpful in taking managerial decisions such as whether to accept the export order or not whether to buy or manufacture, the minimum price to be charged during the depression etc
Marginal Costing
- Only variable costs are included. Fixed costs are recovered from contribution.
- Marginal cost per unit will remain same at different levels of output because variable expenses vary in the same proportion in which output varies
- Difference between sales and marginal cost is contribution and difference between contribution and fixed cost is profit or loss.
- Stock of work-in-progress and finished goods are valued at marginal cost which does not include fixed cost. Fixed cost of a particular period is charged to that very period and is not carried over to the next period by including it in closing stock. Being so, costs of a particular period are not vitiated
- Only variable costs are charged to products, marginal cost technique does not lead to over under absorption of fixed overheads.
- The technique of marginal costing is very helpful in taking managerial decisions because it takes into consideration the additional cost involved only assuming fixed expenses remaining constant.