ABSORPTION

COSTING
VS
MARGINAL
COSTING
 Marginal Costing

• Marginal Costing is a costing technique wherein the marginal cost, i.e.

variable cost is charged to units of cost, while the fixed cost for the
period is completely written off against the contribution.
• Features:
• It is a method of recording costs and reporting profits;
• All operating costs are differentiated into fixed and variable costs;
• Variable cost is charged to product and treated as a product cost whilst
• Fixed cost treated as period cost and written off to the profit and loss account
 Absorption Costing

• Absorption costing is a principle whereby fixed as well as variable

costs are allocated to cost units and total overheads are absorbed
according to activity level .
• Features:
• All overheads are included to calculate total cost of a product.
• Fixed costs are included in the calculations to recover them from the
customers.
• is acceptable under accounting standards to value inventories for financial
statements.
• is used in pricing decisions to calculate selling price by adding profit in total
cost.
 Income determination using Marginal Costing
Particulars Amount(₹) Amount(₹)
Sales Revenue xxx
Less: Marginal Cost of Sales
Opening Stock (Valued at marginal cost) xxx
Add: Production Cost (Valued at marginal cost) xxx
Total Production Cost xxx
Less: Closing Stock (Valued at marginal cost) (xxx)
Marginal Cost of Production xxx
Add: Selling and Distribution Cost xxx
Marginal Cost of Sales (xxx)
Contribution xxx
Less: Fixed Cost (xxx)
Marginal Costing Profit xxx
Income determination using Absorption Costing
Particulars Amount(₹) Amount(₹)
Sales Revenue xxx
Less: Absorption Cost of Sales
Opening Stock (Valued at absorption cost) xxx
Add: Production Cost (Valued at absorption cost) xxx
Total Production Cost xxx
Less: Closing Stock (Valued at absorption cost) (xxx)
Absorption Cost of Production xxx
Add: Selling and Distribution Cost xxx
Absorption Cost of Sales (xxx)
Un-Adjusted Profit xxx
Fixed Production Overhead absorbed xxx
Fixed Production Overhead incurred (xxx)
(Under)/Over Absorption xxx
Adjusted Profit xxx
 Statement to Reconcile Profits
Particulars Amount(₹)
Marginal Costing Profit xxx
Add: Fixed cost element in closing inventory xxx
Less: Fixed cost element in opening inventory (xxx)
Absorption Costing Profit xxx

Calculation of fixed cost element in inventories:

Closing/Opening Stock * Overhead absorption rate

Where,
Overhead Absorption Rate = Budgeted Fixed Production overheads/Budgeted level of Activities
 Differences
Marginal Costing Absorption Costing

Variable Cost is considered as product cost Variable Cost and Fixed Cost are considered
and Fixed Cost is considered as period cost. as product cost.
Overheads are classified as fixed and Overheads are classified as Production,
variable. Selling & Distribution, and Administration.

Determines the cost of next unit. Determines the cost of each unit.

Particularly useful for short‐term decision Required for external reporting.

making.
 The Case
Yeezy
Working Notes
 Benefits
Marginal Costing Absorption Costing
Contribution per unit is constant unlike profit per It is GAAP-compliant.
unit which varies with changes in sales volumes.

Cost control Accounts for All Production Costs

Marginal costing is useful in the decision-making Tracks Profits More Accurately

process.

It is simple to operate. It helps to conform with accrual and matching

concepts which require matching cost with revenue for
a particular period.
Question 76:
THANK YOU