Marginal Costing And Absorption Costing

Product costs are costs identified with goods produced or purchased for resale. Such costs are initially identified as part of the value of stock and only become expenses when the stock is sold. In contrast, period costs are costs that are deducted as expenses during the current period without ever being included in the value of stock held. We saw how product costs are absorbed into the cost of units of output. Now we describe marginal costing and compare it with absorption costing. Whereas absorption costing recognizes fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal costing treats all fixed costs as period costs. Two such different costing methods obviously each have their supporters and we will be looking at the arguments both in favour of and against each method. Each costing method, because of the different stock valuation used, produces a different profit figure and we will be looking at this particular point in detail.

Marginal Cost and Marginal Costing


Marginal Costingis an alternative method of costing to absorption costing

In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated which is sales revenue minus the variable cost of sales. Closing stocks of work in progress or finished goods are valued at marginal (variable) production cost. Fixed costs are treated as a period cost, and are charged in full to the profit and loss account of the accounting period in which they are incurred.

Marginal Cost is the cost of a unit of a product or service which would be avoided if that unit were not produced or provided.

The marginal production cost per unit of an item usually consists of the following:

    • Direct materials,
    • Direct labour,
    • Variable production overheads.

Contribution is the difference between sales value and the marginal cost of sales.

Contribution is of fundamental in marginal costing, and the term ‘contribution’ is really short for ‘contribution towards covering fixed overheads and making a profit’.

Other Custom Business Writing services offers other custom business writing services such as Management writing services: Management essays, Management Dissertations, Management company analysis, Management Research papers and term papers: Finance writing services: Finance essays, Finance Dissertations, Finance case study analysis, Finance Research papers and term papers: Economics Writing Services: Economics essays, Economics Dissertations, Economics thesis, Economics Research papers and Economics term papers: Marketing Writing Services: Marketing essays, Marketing Dissertations, Marketing company analysis, Marketing Research papers and term papers:Business Writing Services: Business Essay, Business Research paper, Business term paper, Business Dissertation, Business Thesis, Business Case study: Auditing Writing Services: Auditing essays,Auditing Research papers, Auditing term papers, Auditing Dissertation, Auditing Thesis, Auditing Case study: Business information systems: Business information systems essays, Business information systems Research papers, Business information systems term papers, Business information systems Dissertation, Business information systems Thesis, Business information Case study: Taxation writing services: Taxation essays, Taxation Research papers, Taxation term papers, Taxation Dissertation, Taxation Thesis, Taxation Case study:Human resources writing services: Human resources essays, Human resource Dissertation, Human resources Thesis, Human resources case study, Human resources Research papers and term papers: Business law writing services: Business law essays, Business law Research papers and term papers, Business law dissertation, Business Thesis, Business law case study. Join the rest of our Business Writing services at Business Writing