Absorption Costing and Marginal Costing

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This report attempts to include the major aspects of these two types of costing methods. The report includes a description of each of the techniques. Furthermore, it also includes a comparative analysis of the two costing processes. The report first deals with marginal costing technique. Absorption costing is then described separately. Once the two techniques are properly portrayed in the report, a comparative analysis that involves two costing processes is provided. Finally, the report ends with a proper conclusion.

The idea of marginal costing is mainly based on the concept of marginal cost. Marginal cost can be viewed from both accountants as well as economists’ angle. In economics, marginal cost is referred to the cost incurred in the process of producing an extra unit of product or service. Whereas, in accountancy marginal cost refers to the entire cost that is obtained after adding the variable cost and prime cost. According to Murthy “all costs other than fixed costs are the marginal cost” (Murthy, 2009). I.C.M.A. London has defined marginal costs properly. According to it, marginal cost is “the amount at any given volume of output by which aggregate costs change if the volume of output is increased or decreased by one unit” (Murthy, 2009). The same organization has defined marginal costing as “the ascertainment of marginal costs and of the effect on profit of changes in the volume or the type of output by differentiating between fixed costs and variable costs” (Murthy, 2009). In this method of costing, mainly those costs that are variable in nature are charged against processes, products, and operations. All the indirect costs are written off against the profit. Major features of marginal costing are as follows –
Marginal costing is one of the most important techniques in the decision-making process of management. It is a crucial tool that is heavily used in the present business environment for the purpose&nbsp.of planning profit and controlling cost.&nbsp.