Marginal Costing
Marginal costing is a cost accounting method that focuses on the cost of producing one additional unit of output. Marginal costs are the incremental costs that are incurred when one additional unit of output is produced.
Absorption Costing
Absorption costing is a cost accounting method that includes all costs, both variable and fixed, in the cost of inventory. This means that fixed costs are “absorbed” into the cost of inventory and are not expensed until the inventory is sold.
System of Profit Reporting
Marginal costing and absorption costing can be used to report profit in different ways. Marginal costing reports profit based on the contribution margin, which is the difference between the selling price and the variable cost per unit. Absorption costing reports profit based on the total cost of production, which includes both variable and fixed costs.
Stock Valuation
Marginal costing and absorption costing can also be used to value inventory. Marginal costing values inventory at the variable cost per unit. Absorption costing values inventory at the full cost per unit, which includes both variable and fixed costs.
Conclusion
Marginal costing and absorption costing are two different cost accounting methods that have different implications for profit reporting and stock valuation. Marginal costing is more accurate in the short term, while absorption costing is more accurate in the long term.
Here are some additional points to consider:
- Marginal costing is more likely to lead to lower profits in the short term, because fixed costs are not expensed until the inventory is sold.
- Absorption costing is more likely to lead to higher profits in the long term, because fixed costs are expensed over time.
- Marginal costing is more useful for decision-making, because it focuses on the incremental costs of production.
- Absorption costing is more useful for financial reporting, because it is required by generally accepted accounting principles (GAAP).