Difference between Absorption Costing and Marginal Costing

The following are the various points of difference between absorption costing and marginal costing.

Absorption CostingMarginal Costing
1. All  costs fixed and variable included for ascertaining

2. Difference unit costs are obtained at different levels of output because of fixed expenses remaining same.

3.      The difference between sales and the total coast is profit.

4.      A portion of fixed coast carried forward to the next period because the closing stock of work in progress and fished goods are valued at cost of production which is included in the fixed cost. In this way, the coast of a particular period is vitiated because fixed cost being a period cost should be charged to the period concerned and should not be carried over to the next period.

5.      If the stock of working in progress and finished good increase during a period, absorption costing will reveal more profit as compared to marginal costing. When such stocks decrease,  less profit is shown by absorption costing than marginal costing because under this technique of costing, closing stock are valued at higher figures as explained above in point (4), I., closing stock are valued at total cost which is inclusive of variable cost and fixed cost.

6.      The apportionment of fixed expenses on an arbitrary basis gives rise to over or under absorption of overheads which ultimately makes the product cost inaccurate and unreliable.

7.      Absorption costing is not very helpful in taking a managerial decision such as whether to accept the export order or not, whether to buy or manufacture, the minimum price to be charger during and depression etc.

8.      Costs are classified according to functional bases such as production cost, office and administrative cost and selling and distribution cost.

9.      Absorption costing fails to establish a relationship of cost, volume, and profit as coast are seldom classified into fixed and variable.

 

1. Only variable costs are included. Fixed costs are recovered from contribution.

2.       The marginal cost per unit will remain same rate different levels of output because variable expenses vary in the same proportion in which output varies.

3.      The difference between sales and marginal cost in contribution and difference between contribution and fixed cost is profit or loss.

4.      The stock of work in progress and finished good are valued at marginal cost which does not include fixed cost. The fixed cost of a particular period is charged to that very period and is not carried over to next period by including it in closing stock. Being so, costs of a particular period are not vitiated.

5.      If the stock of work- in progress and finished good increase during a period, marginal costing reports less income than absorption costing, but when such stock decrease, the technique of marginal costing reveals more information than absorption costing. The difference in profit as arrived at under absorption costing and marginal costing due to the difference in accounting for fixed overhead. The technique of marginal costing values closing stock at their variable costs and does not include an element of fixed costs.

6.      Only variable costs are charged to products, marginal cost technique does not lead to over or under4 absorption of fixed overheads.

7.      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.

8.      Costs are classified according to the behavior of costs i.e., fixed costs and variable costs.

9.      Cost, Volume and Profit ( i.e., CVP) relationship is an integral part of marginal cost studies as cost are classified into fixed and variable costs.

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