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What Are the Differences Between Marginal Costing and Absorption Costing?

Absorption costing includes fixed costs, such as rent paid for office space, as well as variable costs.
Marginal costing considers only variable costs, such as shipping.
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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 29 October 2014
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Marginal costing and absorption costing are two types of separate costing methods that are utilized for the purpose of cost calculations. While these methods are related in the sense that they are used for costing, the two terms have some fundamental principles in theory and practice that distinguish them from each other. In order to better understand the difference between marginal costing and absorption costing, it is necessary to understand the meaning or definition of the two terms. Marginal costing is a method for calculating costs that takes into account the variables, while the absorption method of coating not only takes the variables into account but also includes various fixed costs. As such, the major difference between these systems stems from the fact that absorption costing includes both the fixed and variables, unlike the marginal method that only concentrates on the variables.

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In order to further understand the concepts of marginal costing and absorption costing, it will also be necessary to understand the meaning of variable and fixed costs as they are applied to the calculation of the two costing methods. Businesses usually have various expenses that will either be assigned as a fixed or a variable cost overall. The variable cost of operating a business or for production or manufacturing generally refers to the types of cost that are not constant since they are subject to change based on the level of business operations generated by the company under consideration during various defined periods. On the other hand, the same business may have costs that mainly stay the same and can be easily relied on as a means for making financial projections. While the first category of costs includes shipping charges, the second type includes the payment of rent or lease for the use of a premises by the company.

A difference in marginal costing and absorption costing lies in the fact that the marginal costing method is mainly concerned with variable cost unlike the absorption method that includes the fixed and the variable types of costs generated by the business as part of its activities. Another difference between marginal costing and absorption costing can be seen in the fact that the marginal method of costing is a somewhat simple method since it mainly concentrates on just one aspect. This propensity for neglecting fixed costs, however, may lead to misleading results. In the same sense, the absorption method makes for a more accurate outcome after costing.

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