what are the difference between absorption and marginal costing system?

Question

accounting question

Answer 1

The term marginal costing system is also sometimes replaced with the terms "Variable Costing" or "Direct Costing". However, the term "Direct Costing" can not be supported because this method does not include all the direct costs while computing results, and also it includes some indirect costs as manufacturing overheads.

Therefore variable costing, or marginal costing, is a method of inventory costing in which all variable manufacturing costs regardless of direct or indirect costs are regarded as inventoriable costs. All fixed manufacturing costs are excluded from inventoriable costs. These are costs of the period in which these are charged to the Income of the concern. Obviously when the fixed costs will not be inventorised they will not be carried forward with the costs of inventories to the next period, the inventories will cost less comparing the absorption costing and profits will be lesser.

Absorption Costing is a method of inventory costing in which all variable and fixed manufacturing costs are inventorised. The inventory absorbs all the manufacturing costs whether fixed or variable. As the fixed costs are inventorised therefore when there are some unsold inventories they obviously carry a portion of fixed costs. This will reduce the ultimate costs of sales carrying a portion of fixed costs because a portion of fixed cost will be carried to next period with inventories therefore inflating profits.

Answer 2

Absorption And Marginal Costing

Answer 3

One more key difference is that if you produce more units than you sell, absorption costing will give you a better net income or EBITDA, if you sell more than you produce, variable costing will give you a better bottom line. This is due to fixed expenses being absorbed, and remaining, on the balance sheet in absorption costing, and only being expensed at the time of sale. In variable costing the fixed expenses will be expensed, even if no products are sold.

Answer 4

Absorption basically looks at all your costs, fixed and variable. Fixed costs are costs that will remain constant regardless of production levels. Variable costs are costs that fluctuate with production levels. Marginal costing, a.k.a. variable costing, basically looks at the contribution margin (contiribution to profit) an additional unit sale will generate. Both are important concepts. If you ignore your fixed costs, you could price your product incorrectly and your overhead will kill you. If you ignore your contribution margins, you could set your production schedule incorrectly and lose out on potential profits.

Answer 5

You are almost correct in you assumption. Allocated costs would be the basic value of the item, but there are considerations like. VAT, and or dispatch charges.