Question

Want to give an introduction about Marginal costing and Absorption costing. (Approximately 500 words). and compare marginal costing system and absorption costing system.

Also, analyse which method is better and why. Comparison between the two methods (Approximately 600 words)

Answer 1

MARGINAL COSTING

Marginal costing is the ascertinement of marginal cost and of the effect on profit of changes in volume and type of output by differentiating between fixed and variable costs. Several other terms in use like direct costing , contributory costing, variable costing. Differential costing and incremental costing or used more or less anonymously with marginal costing

ABSORPTION COSTING

In absorption costing direct cost refers to the cost which is attributable to a cost center of cost unit (e.g. direct material, direct expense including traceable fixed expenses i.e., fixed expenses which are directly chargeable in direct costing ( marginal costing) factory variable cost is taken as direct cost where as in absorption costing it is taken as indirect

MARGINAL COSTING V/S ABSORPTION COSTING

BASIS FOR COMPARISON	MARGINAL COSTING	ABSORPTION COSTING
Meaning	A decision making technique for ascertaining the total cost of production is known as Marginal Costing.	Apportionment of total costs to the cost center in order to determine the total cost of production is known as Absorption Costing.
Cost Recognition	The variable cost is considered as product cost while fixed cost is considered as period costs.	Both fixed and variable cost is considered as product cost.
Classification of Overheads	Fixed and Variable	Production, Administration and Selling & Distribution
Profitability	Profitability is measured by Profit Volume Ratio.	Due to the inclusion of fixed cost, profitability gets affected.
Cost per unit	Variances in the opening and closing stock does not influence the cost per unit of output.	Variances in the opening and closing stock affects the cost per unit.
Highlights	Contribution per unit	Net Profit per unit
Cost data	Presented to outline total contribution of each product.	Presented in conventional way.