MARGINAL AND ABSORPTION

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Mollyjayne1
Mollyjayne1 Registered Posts: 2
in Management Accounting: Costing
With the run up to the Level 3 synoptic exam in May and after looking in my textbooks and online it seems they're really focusing on Marginal and Absorption costing and how it can effect a company. I wasn't too confident on it in the Costing exam in January but somehow passed it. Can somebody explain in layman terms the difference, advantages and disadvantages please? I feel like the book sort of skips the very first step of explaining them!

Thanks!

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  • AC88
    AC88 Registered Posts: 44
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    The difference between marginal and absorption costing is how the fixed assets are treated, that's the very layman difference between the two

    Absorption costing aims to determine the 'full' cost of the unit, so basically when using absorption costing add up all the costs i.e. direct labour, direct materials, admin costs INCLUDING fixed costs, take the total of this and divide by the amount of units and this will give you the cost per unit.

    With marginal costing do exactly the same but EXCLUDE fixed costs, this will give you a different cost per unit and different profit.

    By using marginal costing ALL the fixed costs will be incurred in the period, however, with absorption costing some fixed costs will be carried into the next period and only recognised when the unit is sold.

    Does this make sense?

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