Marginal Costing as a cost accounting system is significantly different from absorption costing. It is an alternative method of accounting for costs and profit, which rejects the principles of absorbing fixed overhead into unit costs.
In Marginal costing:
Closing stocks are valued at marginal production cost,
Fixed costs are charged in full against the profit of the period in which they are incurred.
In absorption costing (sometimes referred to as full costing):
- Closing stocks are valued at full production cost, and including a share of fixed production and include a share of fixed production costs.
- This means that the cost of sales in a period will include some fixed overhead incurred in a previous period (in opening stock values) and will exclude some fixed overhead incurred in the current period but carried forward in closing stock values as a charge to a subsequent accounting period.
This distinction between marginal costing and absorption costing is very important and the contrast between the systems must be clearly understood. Work carefully through the following example to ensure that you are familiar with both methods.
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