Lesson 1,
Topic 1
In Progress
7.1 Differences between marginal costing and absorption costing
Marginal and absorption costing are two different approaches to dealing with fixed production overheads and whether or not they are included in valuing inventory.
DISTINCTION BETWEEN MARGINAL AND ABSORPTION COSTING
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 |
VALUATION OF PRODUCTS UNDER MARGINAL AND ABSORPTION COSTING
Marginal costing
| Product costs | Shs |
| D. Material
D. Labour V. Production O/H |
xxx xxx xxx |
| xxx |
Absorption costing
| Product costs | Shs |
| D. Material
D. Labour V. Production O/H Fixed O/H |
xxx xxx xxx xxx xxx |
