ittech: Difference between absorption costing and marginal costing

ittech: Difference between absorption costing and marginal costing.

Marginal costing brings out contribution and profit margin per unit of output and clearly brings out the effect of the change in activity. If facilities making policy decision in a number of managerial problems, such as, determining profitability of products, introducing a new product, discontinuing a product, fixing selling price, deciding whether to make or buy, utilizing spare capacity, profit planning.
3) The distinction between the product cost and period cost helps easy understanding of marginal cost statements.
4) Closing inventory of work-in- progress and finished goods are valued at marginal or variable cost only. This method leads to greater accuracy in arriving at profit as it eliminates any carry over of fixed costs of the previous period through inventory valuation.
5) As a corollary to above, since fixed cost do not enter in to product cost, it eliminates the process of allocating, apportioning and absorbing overheads, and adjusting under and over absorbed overheads. Therefore, the method is simpler to operate.

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