Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Marginal Costing vs Absorption Costing

  • Having introduced you to both absorption costing and marginal costing
  • It is time to look at some of the differences between the two
  • In discussing marginal costing we have already pointed out the differences between it and marginal costing
  • Now we will create a more complete summary of these differences
Absorption CostingMarginal Costing
A costing technique that assumes both fixed costs and variable costs as product costsA costing technique that assumes only variable costs as product costs
Both fixed costs and variable costs are considered in the product costOnly variable costs are considered as product cost and fixed costs are considered to be period costs
Inventories include both variable costs and a "fair" share of fixed overheadsInventories only include variable costs
Emphasis is on making sure overheads are recoveredEmphasis is calculating the contribution of each unit
The cost of each next unit includes changes the cost of each unitThe cost of producing each unit is fixed
Costs are classified as Production, Administration and Selling and DistributionCosts are mainly just classified as Fixed and Variable
Since fixed costs are also considered profits appear lower under absorption costingProfit is measured using the Profit Volume Ratio
Considers the cost of each unit/every unitConsiders to cost of producing the next unit/each extra unit
Highlights the contribution per unitHighlights the net profit per unit

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