Difference Between Marginal Costing and Absorption Costing

Difference Between Marginal Costing and Absorption Costing

5 mins read34.6K Views Comment
Anshuman
Anshuman Singh
Senior Executive - Content
Updated on May 31, 2024 12:37 IST

The main difference between marginal costing and absorption costing is that in marginal costing, variable cost is treated as product cost, and fixed cost is treated as period cost. On the other hand, in absorption costing, variable and fixed costs are treated as product costs. In this article, we will explore the difference between marginal costing and absorption costing in great detail. 

2022_12_MicrosoftTeams-image-174.jpg

Table of contents (TOC)

Difference Between Marginal Costing and Absorption Costing 

For a better understanding, let’s go through the difference between marginal costing and absorption costing in a tabular format.

Benchmark Marginal costing Absorption costing
What is it? A technique in which only variable costs are assumed as product costs.  A technique for determining product costs that consider both fixed and variable costs.
Are both fixed costs and variable costs considered in product costs? No. Variable cost is treated as product cost, and fixed cost is treated as period cost. Yes. Both fixed costs and variable costs are considered in product costs.
Nature of overheads Variable costs and fixed costs Distribution, production, and selling & administration.
What does it determine? It determines the cost of the next unit. It determines the cost of each unit.
Is the cost per unit affected by changes in opening/closing stocks? No. Since marginal costing determines the cost of the next unit, a change in opening/closing stocks doesn’t affect the cost per unit. Yes Yes
Objective To emphasize the importance of contributing to the product cost. To demonstrate the accuracy and fairness of product cost treatment.

Uncover top government certifications to boost your chances of getting top government job oriented courses after 10th in multiple government sectors.

What is Marginal Costing?

Marginal costing definition: Marginal Costing is a decision-making technique for determining the total cost of production.

In marginal costing, variable cost is treated as product cost and fixed cost as period cost. And this type of costing is also known as variable costing. This technique accounts for the variable costs associated with the extra units produced. In this technique, fixed expenses are not considered because they do not vary due to ongoing changes.

You can also explore: Marginal Costing: Meaning and Advantages

Gain a deeper understanding of accounting principles and practices, enrol to accounting programmes from the top colleges, explore online accounting courses, and make a career in this highly rewarding field.

Marginal costing example:

Let’s look at an example to understand better “marginal costing.” Assume there is a shoe factory that produces 100 “Black shoes,” and to produce 100 black shoes costs ₹5000. To make one more black would cost ₹800. This is the marginal cost: the cost of producing one more unit of a good or service.

Using this technique, management can easily decide, or this technique will also assist management in understanding whether increasing production to 101 or 102 will be financially beneficial.

Activity-Based Costing: Definition and Advantages
Activity-Based Costing: Definition and Advantages
Activity-Based Costing (ABC) is a precise method of cost accounting that identifies and assigns costs to specific activities. It provides a more accurate reflection of the costs incurred by products...read more
Target Costing: Meaning and Applications Advantages
Target Costing: Meaning and Applications Advantages
Target costing is a cost management approach used in businesses to determine the desired cost of a product based on market conditions and customer expectations. It involves setting a target...read more
Standard Costing: Meaning, Advantages and Variances
Standard Costing: Meaning, Advantages and Variances
Standard costing is a cost accounting method where predetermined standards for costs and performance are established. It compares actual costs and performance against these standards to analyze variances and improve...read more

What is Absorption Costing? 

Absorption costing definition: Absorption costing is calculating product costs considering fixed and variable costs.

Absorption costing is GAAP compliant, and contribution per unit is considered. The cost of an abortion is primarily used for external reporting to the government, tax authorities, and shareholders.

Abortion costs include direct manufacturing costs, such as direct labor and materials, and fixed overhead costs incurred during the production process, such as utility costs. Let’s go through an example to understand the term “absorption costing” in a better way.

Absorption costing example:

Assume a company produces 5,000 toys with variable costs (a variable cost is a business expense that varies based on the amount a company produces or sells) of ₹60 direct materials, ₹110 direct labor, and ₹40 variable overhead per unit. The fixed overhead is ₹100,000 in addition to the per-unit costs.

To calculate the toy cost using absorption costing, add the per-unit costs together (direct labor, direct materials, variable overhead). Following that, per-unit costs must be obtained from the fixed overhead for the per-unit overhead to be applied to the per-unit cost. The absorption costing per unit is final when the overhead is added to the per-unit costs.

Hence, absorption cost per unit: (direct materials + direct labor + variable overhead) + (fixed overhead / number of units) = (60+110+40 = ₹210) + (100,000/5000 = ₹20). So, the absorption cost per unit is ₹230.

Key Difference Between Absorption Costing and Marginal Costing 

Here are the key differences between marginal costing and absorption costing:

  • While absorption costing is challenging to implement, marginal costing is simple.
  • In absorption costing, contribution per unit is considered, whereas net profit per unit is considered in marginal costing.
  • Absorption costing emphasizes overhead recovery, whereas marginal costing emphasizes calculating each unit’s contribution.
  • The primary consideration is given to the cost of each unit in absorption costing. However, the cost of producing the next unit is prioritised in marginal costing.
  • In absorption costing, variable and fixed costs are factored into the product’s price. In contrast, only variable costs are considered product costs in marginal costing, while fixed costs are classified as period costs.

Conclusion

In this article, we have explored the difference between marginal costing and absorption costing in great detail, along with their example. If you have any queries related to the article, please feel free to send your queries through comments. We will be happy to help and answer all your queries.

Recommended Reads

Difference between Standard Costing and Budgetary Control
Difference between Standard Costing and Budgetary Control
The primary difference between Standard Costing and Budgetary Control is their focus. Standard setting cost benchmarks and analyzing actual costs against these standards for cost control. Budgetary control revolves around...read more

Difference between Job Costing and Process Costing
Difference between Job Costing and Process Costing
Job costing is used for unique, custom orders, tracking costs per job, while process costing averages costs across continuous, homogeneous production, ideal for mass manufacturing of similar items. Let's understand...read more

Difference Between Cost Control and Cost Reduction
Difference Between Cost Control and Cost Reduction
Cost control focuses on maintaining costs within a set budget or standard, aiming for efficiency within existing processes. Cost reduction, however, seeks permanent and real savings by identifying and eliminating...read more

Difference between Receipt and Payment Account
Difference between Receipt and Payment Account
A receipt account tracks incoming funds, like customer payments and donations, while a payment account records outgoing funds, such as expenses and salaries. Receipt accounts focus on revenue, while payment...read more

FAQs

What is marginal costing?

Marginal Costing is a decision-making technique for determining the total cost of production.

What is absorption costing?

Absorption costing is a technique of calculating product costs considering fixed and variable costs.

What is the difference between marginal costing and absorption costing?

The main difference between marginal costing and absorption costing is that in marginal costing, variable cost is treated as product cost, and fixed cost is treated as period cost. On the other hand, in absorption costing, variable and fixed costs are treated as product costs.

About the Author
author-image
Anshuman Singh
Senior Executive - Content

Anshuman Singh is an accomplished content writer with over three years of experience specializing in cybersecurity, cloud computing, networking, and software testing. Known for his clear, concise, and informative wr... Read Full Bio