Absorption Costing vs Marginal Costing

This article discusses the differences between absorption costing and marginal costing in management accounting. It explains how absorption costing considers both direct and indirect costs, while marginal costing only considers variable costs. The article also provides examples of profit/income statements and reconciliation statements for both methods. Based on the analysis, it suggests that absorption costing is a better technique for deriving profit or loss in the organization.

MANAGEMENT
ACCOUNTING

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Absorption costing
Absorption costing is the type of method which generally used to consider calculating the cost of
different element in the organization on the basis of taking into consideration indirect as well as
direct costs in the organization. This is the type of the method which looks at considering full cost of
the production or service providence in the organization. It not only used to includes the cost of the
material or labour in the organization but it also used to includes the manufacturing overhead in the
organization as well.
Absorption Costing Profit/Income Statement For The Month June
Sales revenue (1500*35) £52500
Less: Cost of the Goods Sold £
Opening Inventory £
Add: Cost of the goods manufactured (£27*1500) £ 40500
Gross Profit £12000
Less: Selling fixed expenses £10000
Selling variable expenses (52500*15%) £7875
Net loss £5875
(Fixed manufacturing overhead cost assumed at £15000)
Marginal Costing
Marginal costing is the other form of costing, it is the type of the costing in which the
variable cost is charged from the unit of the cost in the market. At the same time fixed cost in
the organization is generally used to written off against the contribution which has been done.
Variables costs are the type of the costs which generally used to change as output generally
used to change in general. These are generally treated as a marginal costing as a cost of the
product in the organization.
Marginal Costing Profit/Income Statement For The MonthJune
Sales revenue (1500*35) £52500
Less: Cost of the goods sold
Opening Inventory £
Add: Variable Cost of the goods manufactured
(22*1500)
£ 33000
Production contribution £19500
Less: Selling &Admin variable overheads (£7875)
Production Profit £11125
Less: Selling &Admin Fixed overheads (£10000)
Fixed overhead manufacturing cost (£15000)
Net loss £13875

Reconciliation Statement For The Year Ending 30June
Absorption costing profit (£5875)
Less: Fixed cost (£8000)
Marginal costing loss (£13875)
Interpretation: After going through both the data which has been derived by
conducting the Marginal costing as well as absorption costing method it is clearly understand
that Absorption costing technique in the organization is the better costing technique for the
organization as compare to the marginal costing in the organization. Loss which has been
derived from the absorption costing method is £5875 which is much lesser that the loss which
has been derived from using Marginal costing method in the organization. It has been
identified that Loss which has been derived with the help of Marginal costing technique is
£13875. So by comparing both the data which has been derived it can be suggested to the
management that they should trust the Absorption costing for the purpose of deriving the
profit or loss of the company. Reason behind the same is that it is showing the better and
efficient result as compare to the marginal costing method in the organization.

REFERENCES
Tabitha, N. and Oluyinka, I. O., 2016. Cost accounting techniques adopted by manufacturing
and service industry within the last decade. International Journal Of Advances In
Management And Economics. 5(1). pp.48-61.
MOHAMED, K. M. H. and MOHAMED, A. H. A., 2018. Value Engineering Technique and
Its Role on Reducing of Manufacturing Costs (Case Study: Giad Industrial Group-
Sudan).