Difference between Absorption Costing and Marginal Costing

The following are the main points of difference between absorption costing and marginal costing: 

1. Under marginal costing, the distinction between the period cost and product cost determines when costs are matched with revenues. Direct or variable or product costs are assigned to products and matched with revenues when they are recognized, while period costs are matched with revenues in the period in which the costs are incurred. But in absorption costing, fixed costs are treated as part of production cost and accordingly inventory is valued.

2. In absorption costing, arbitrary apportionment of fixed costs over the products results in underabsorption or overabsorption of such cost, whereas, in marginal costing since fixed costs are excluded, there is no underabsorption or overabsorption of overheads.

3. In absorption costing, managerial decision-making is based on profit, which is the difference between the sales value and the total cost of the product. But in marginal costing, the managerial decisions are based on contribution and not profit. Contribution is the difference between the sales value and the marginal cost of the product.

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