Difference Between Marginal Costing and Absorption Costing

If you want to understand how the costs of the finished products or inventories are calculated, you would need to give special attention to marginal costing and absorption costing.

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  • Marginal costing is a method where the variable costs are considered the product cost, and the fixed costs are considered the period’s costs.On the other hand, absorption costing is a method that considers both fixed and variable costs as product costsProduct CostsProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company.read more. This costing method is essential, particularly for reporting purposes. Reporting purposes include both financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more and tax reporting.

There’s a debate on which costing method is better – marginal or absorption costing.

Marginal Costing vs. Absorption Costing Infographics

Key Differences

  • Marginal costing doesn’t consider fixed costs under product or inventory valuationInventory Valuation Inventory Valuation Methods refers to the methodology (LIFO, FIFO, or a weighted average) used to value the company’s inventories, which has an impact on the cost of goods sold as well as ending inventory, and thus has a financial impact on the company’s bottom-line numbers and cash flow situation.read more. On the other hand, absorption costing takes both fixed and variable costs into account.Marginal costing can be classified as fixed costs and variable costs. Absorption costing can be classified as production, distribution, and selling & administration.The purpose of marginal costing is to show forth the contribution of the product cost. The purpose of absorption costingAbsorption CostingAbsorption costing is one of approach which is used for the purpose of valuation of inventory or calculation of the cost of the product in the company where all the expenses incurred by the company are taken into the consideration i.e., it includes all the direct and indirect expenses incurred by the company during the specific period.read more is to provide a fair and accurate picture of the profits.Marginal costingMarginal CostingMarginal costing in economics and managerial accounting refers to an increase or decrease in the total cost of production due to a change in the quantity of the desired output. It is variable, depending on the inclusion of resources required to produce or deliver additional unit(s) of a product or service.read more can be expressed as a contribution per unit. Absorption costing can be expressed as net profit per unit.Marginal costing is a method of costing and isn’t a conventional way of looking at costing methods. On the other hand, absorption costing is used for financial and tax reporting, and it is the most convenient method of costing.

Comparative Table

Conclusion

From the discussion above, it is clear that absorption costing is a better method than marginal costing in usefulness. But marginal costing may be useful if a company has just started and the purpose is to see the contribution per unit and the break-even pointBreak-even PointBreak-even analysis refers to the identifying of the point where the revenue of the company starts exceeding its total cost i.e., the point when the project or company under consideration will start generating the profits by the way of studying the relationship between the revenue of the company, its fixed cost, and the variable cost.read more.

Otherwise, it is better to use absorption costing. It will help a firm look at its cost comprehensively. It will be able to strategize around cost-effectively.

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This article has been a guide to marginal costing vs. absorption costing. Here we discuss the top differences between marginal and absorption costing, infographics, and a comparison table. You may also have a look at the following articles for gaining further knowledge in accounting –

  • Variable Costing vs. Absorption CostingAverage Cost vs. Marginal CostMargin vs. ProfitDifferences Between Margin and Markup