# Absorption Costing vs Marginal Costing

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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.

## Absorption Costing vs Marginal Costing

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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
Production Profit £11125
Net loss £13875

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