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.
Differences
Here are some of the key differences between marginal costing and absorption costing:
- Treatment of fixed costs: Marginal costing treats fixed costs as period costs, which are expensed in the period in which they are incurred. Absorption costing treats fixed costs as product costs, which are included in the cost of inventory and are not expensed until the inventory is sold.
- Profit reporting: 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 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.
- Usefulness for decision-making: Marginal costing is more useful for decision-making, because it focuses on the incremental costs of production. Absorption costing is less useful for decision-making, because it includes fixed costs, which are not incremental costs.
- Usefulness for financial reporting: Absorption costing is more useful for financial reporting, because it is required by generally accepted accounting principles (GAAP). Marginal costing is not required by GAAP, but it can be used for internal reporting purposes.