What is the Difference Between Absorption Costing and Marginal Costing?
🆚 Go to Comparative Table 🆚The main difference between absorption costing and marginal costing lies in the way costs are treated and allocated to products. Here are the key differences between the two methods:
- Cost Classification: In marginal costing, costs are classified as variable or fixed, while in absorption costing, costs are classified as direct or indirect.
- Cost Allocation: Marginal costing assumes only variable costs as product costs, while absorption costing takes both fixed and variable costs into account.
- Purpose: The purpose of marginal costing is to show the contribution of the product cost, focusing on the profitability of each individual sale. In contrast, absorption costing emphasizes overhead recovery and is mainly used for financial and tax reporting.
- Method of Calculation: In absorption costing, the total cost is divided by the number of units produced to determine the cost per unit. Marginal costing, on the other hand, calculates the cost of producing one additional unit by dividing the change in manufacturing costs by the change in the quantity.
In summary, absorption costing considers all direct and indirect expenses incurred by a company during a specific period, while marginal costing focuses on variable costs and the contribution margin of each unit produced. Both methods have their advantages and are used for different purposes, such as decision-making and financial reporting.
Comparative Table: Absorption Costing vs Marginal Costing
Here is a table comparing the differences between absorption costing and marginal costing:
| Basis for Comparison | Marginal Costing | Absorption Costing |
|---|---|---|
| Meaning | A technique that assumes only variable costs as product costs. | A technique that assumes both fixed costs and variable costs as product costs. |
| What it's all about? | Variable cost is considered as product cost, and fixed cost is assumed as a cost for the period. | Both fixed cost and variable costs are considered in product cost. |
| Nature of Overheads | Fixed costs and variable costs are treated as product costs. | Fixed costs and variable costs are treated as product costs. |
| Profitability | The profitability of each individual sale will be based on the contribution margin (which excludes fixed costs). | The profitability of each individual sale will be based on the gross margin (which includes applied overhead). |
| Calculation | Marginal costing is based on variable costs but excludes fixed costs. | Absorption costing includes both direct and indirect costs (fixed and variable). |
| Implementation | Marginal costing is simpler to implement. | Absorption costing is more complex to implement. |
| Fixed Costs | Fixed costs are treated as period costs. | Fixed costs are considered as product costs. |
| Net Profit | Net profit per unit is considered in marginal costing. | Contribution per unit is considered in absorption costing. |
In summary, marginal costing focuses on variable costs and excludes fixed costs, while absorption costing considers both fixed and variable costs. Marginal costing is simpler to implement and is based on the contribution margin, whereas absorption costing is more complex and is based on the gross margin.
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- Average Cost vs Marginal Cost
- Opportunity Cost vs Marginal Cost
- Costing vs Cost Accounting
- Management Accounting vs Cost Accounting
- Absolute Cost Advantage vs Comparative Cost Advantage
- Activity Based Costing vs Traditional Costing
- Marginal Analysis vs Break Even Analysis
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- Absorption vs Adsorption
- Absorptance vs Absorbance
- Costing vs Budgeting
- Job Costing vs Contract Costing
- Absorptivity vs Molar Absorptivity
- Job Order Costing vs Process Costing
- Job Costing vs Batch Costing