a). Treatment of Fixed Cost and Variable Cost:
Absorption costing is a total cost technique since the total cost is considered for the determination of profit. Both fixed and variable costs are charged to operations, processes or job. In marginal costing only variable costs are charged to products, process or operations. Fixed costs are written-off against Profit and Loss Account.
b) Valuation of W.I.P. and Finished Goods:
In Absorption Costing work-in-process and stocks are valued at total cost which includes both variable and fixed costs. In Marginal Costing work-in-process and stocks are valued at marginal cost only. This results in higher valuation of stock in absorption costing than in marginal costing.
c) Apportionment of Fixed cost:
In Absorption Costing apportionment of fixed costs is done arbitrarily which may result in over-absorption or under-absorption of costs. Arbitrary apportionment of fixed costs does not arise since fixed costs are written-off.
d) Determination of Profit:
In absorption costing managerial decisions are taken on the basis of profit which is excess of sale price over total cost. But Marginal Costing focuses its attention on ‘contribution’ which is the excess of sales value over variable cost.
Contribution = Sales – Variable Costs
