Implications of Marginal Costing and Absorption Costing
1. Accounting for Profits:
The marginal costing method states that the changes in sales volume and variable expenses have a direct impact on the net profit that is generated by the business. The overhead expenses that are fixed for production are considered to be period costs.
When using absorption costing, the net profit is affected by both variable and fixed costs, and it may change depending on the volume of production. This is because the absorption of fixed manufacturing overhead into product costs causes the net profit to fluctuate at different rates.
2. Assessment of the Inventory:
A closing inventory value that simply takes into account variable production costs is referred to as marginal costing.
According to the absorption costing method, the closing inventory takes into account both variable and fixed input costs.
3. Decision Making:
Marginal costing is implied for making decisions that are short-term in nature as it solely takes into account variable costs and concentrates on the contribution margin.
Absorption costing is taken into consideration for long-term decision-making and strategic planning because it takes into account the whole cost of production.
4. Implications for Taxes:
In times of declining output, marginal costing may result in lower taxable earnings since fixed expenses are expensed immediately. This is because marginal costing is done.
As a result of the fact that fixed expenses are included in the inventory and are only expensed when the product is sold, absorption costing has the potential to result in larger taxable profits if output declines.
Difference between Marginal Costing and Absorption Costing
Marginal Costing and Absorption Costing are both different approaches which are used for the valuation of inventory. Marginal Costing is a method of costing in which only variable expenses are taken into consideration while calculating the total cost of the product whereas Absorption costing is a method of costing that considers both fixed and variable costs while calculating the total cost of a product.