This document provides an overview of absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed costs, as product costs. Marginal costing only treats variable manufacturing costs as product costs and considers fixed costs as period costs. The key differences are that absorption costing leads to higher inventory valuations by including fixed costs, while marginal costing results in lower inventory values using only variable costs. Marginal costing is simpler and more useful for decision-making as it focuses on variable costs relevant to production changes.
This document provides an overview of absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed costs, as product costs. Marginal costing only treats variable manufacturing costs as product costs and considers fixed costs as period costs. The key differences are that absorption costing leads to higher inventory valuations by including fixed costs, while marginal costing results in lower inventory values using only variable costs. Marginal costing is simpler and more useful for decision-making as it focuses on variable costs relevant to production changes.
This document provides an overview of absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed costs, as product costs. Marginal costing only treats variable manufacturing costs as product costs and considers fixed costs as period costs. The key differences are that absorption costing leads to higher inventory valuations by including fixed costs, while marginal costing results in lower inventory values using only variable costs. Marginal costing is simpler and more useful for decision-making as it focuses on variable costs relevant to production changes.
This document provides an overview of absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including fixed costs, as product costs. Marginal costing only treats variable manufacturing costs as product costs and considers fixed costs as period costs. The key differences are that absorption costing leads to higher inventory valuations by including fixed costs, while marginal costing results in lower inventory values using only variable costs. Marginal costing is simpler and more useful for decision-making as it focuses on variable costs relevant to production changes.
ABSORPTION COSTING AND MARGINAL COSTING AYJAZ AHMAD MALIK 1ST M.COM ROLL NO: 10 1 INTRODUCTION • We allocate all manufacturing costs to products regardless of whether they are fixed or variable. This approach is known as absorption costing/full costing. • However, only variable costs are relevant to decision-making. This is known as marginal costing/variable costing.
3 Absorption Costing • It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs. • Under this technique, cost per unit remains same only when the level of output remains same. But when the level of output changes the cost per unit also changes because of the presence of fixed cost which remains constant.
4 Marginal costing • It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost. • According to ICMA, London "Marginal cost is the amount at any given volume of output, by which aggregate costs are charged, if the volume of output is increased or decreased by one unit." 5 • Meaning: Marginal cost is the cost nothing but a change occurred in the total cost due to changes taken place on the level of production i.e., either an increase / decrease by one unit of product.
• Marginal Cost = Direct Material + Direct Labor +
Direct Expenses + Variable Overheads.
6 Difference Between Absorption And Marginal Costing
7 Absorption costing Marginal costing Treatment for Fixed Fixed manufacturing fixed manufacturing overhead are treated manufacturing overheads are as period costs. It is overheads treated as product believed that only the cost. It is believed variable costs are that products cannot relevant to decision- be produced without making. the resources Fixed manufacturing provided by fixed overheads will be manufacturing incurred regardless overheads there is production or not 8 Absorption costing Marginal costing Value of High value of Lower value of closing stock closing stock will be closing stock that obtained as some included the variable factory overheads cost only are included as product costs and carried forward as closing stock
9 Advantages of Marginal Costing 1. Marginal costing is simple to understand. 2. By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided. 3. It prevents the illogical carry forward in stock valuation of some proportion of current year’s fixed overhead. 4. It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate.
10 Disadvantages of marginal costing 1. The separation of costs into fixed and variable is difficult and sometimes gives misleading results. 2. Fixed production costs are not spread out between units of production. 3. The closing is not valued according to accounting standards.
11 Characteristics of Marginal costing
12 1.Classification into Fixed and Variable Cost: Costs are bifurcated, on the basis of variability into fixed cost and variable costs. In the same way, semi variable cost is separated. 2. Valuation of Stock: While valuing the finished goods and work in progress, only variable cost are taken into account. However, the variable selling and distribution overheads are not included in the valuation of inventory. 3. Determination of Price: The prices are determined on the basis of marginal cost and marginal contribution. 4. Profitability: The ascertainment of departmental and product’s profitability is based on the. 13 Conclusion • Marginal costing is very useful tool in hands of management and is extensively used for cost control ,decision making and profit planning . At last ,we can say that absorption costing is total cost technique and marginal costing is variable cost technique.
14 References 1 . RAVI M KISHORE - Cost and management Accounting – 6th edition – TAXMANN’S Publications. 2. RAVI M Kishore – Advanced Management Accounting – 1997 TAXMAN’S Publications . 3. M Y KHAN, P K JAIN – cost accounting – MC Grew Hill Publications .
