Similarities between absorption costing and marginal costing

 Both play a huge role in inventory valuation

Differences between Absorption Costing and Marginal Costing

1. Definition of Absorption and Marginal Costing

Absorption costing is a costing system whereby all manufacturing costs, including variable and

fixed costs, are classified as part of product costs while marginal costing is a costing technique

whereby the marginal cost is charged to units of costs while the fixed cost is completely written

off against the contribution. 

2. Costs involved in  Absorption and Marginal costing

In absorption costing, both variable and fixed costs are considered in the cost of the product. On

the other hand, in marginal costing, only variable costs are considered as product cost and fixed

costs are classified as period costs. 

3. Contribution per unit

In absorption costing, contribution per unit is considered while in marginal costing, net profit per

unit is considered. 

4. Costs per unit

In absorption costing, major consideration on the cost of each unit is given priority. However, in

marginal costing, major consideration on the cost of producing the next unit is given priority. 

5. Overheads recovery
 Absorption costing emphasizes overheads recovery while marginal costing emphasizes the

calculation of the contribution of each unit. 

6. Classification of overheads

In absorption costing, overheads are classified into administration, production, distribution and

selling overheads. On the other hand, in marginal costing, overheads are classified into fixed and

variable overheads.

7. Ease of operation

While absorption costing is not easy to operate, marginal costing is easy to operate. 

8. Effect on cost per unit

In absorption costing, the cost per unit is affected by variances in the opening and closing stock

while in marginal costing the cost per unit is not affected by variances in the opening and closing

stock. 

9. GAAP compliance

While absorption costing is GAAP compliant, marginal costing is not GAAP compliant. 

10. Reporting

Absorption costing is used for external reporting to the government, tax authorities and

shareholders while marginal costing is used for internal reporting particularly to the management

for decision making. 

11. Decision making

While absorption costing is not very helpful in making managerial decisions, marginal costing is

helpful in decision making due to the fact that it considers additional costs involved. 

Absorption costing vs. Marginal costing: Comparison Table

Summary of Absorption Costing vs. Marginal Costing

Profits generated differ, depending on which costing method is used. This is because the

absorption costing method includes fixed production costs to the output while the marginal

costing method does not. Absorption costing also creates variances in the budgeted and actual

levels because fixed overheads remain the same, irrespective of the levels of output. Both can be

used, depending on an entity’s preference and business models.