MindMap Gallery Merginal and Absorption Costing

Merginal and Absorption Costing

In the realm of managerial accounting, understanding different costing methods is crucial for assessing product profitability, making informed decisions, and effectively managing costs. Two commonly used approaches are Marginal Costing (also known as Variable Costing) and Absorption Costing (also known as Full Costing). To gain a comprehensive understanding of these costing methods and their implications, a mind map provides a powerful visual tool. This mind map aims to demystify the concepts of Marginal and Absorption Costing, illustrating their key components and showcasing the differences between the two approaches.

Edited at 2023-08-17 05:20:49

Ali Yusuf Hossain

Merginal and Absorption Costing

Ali Yusuf Hossain

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Outline

Merginal & Absorption Costing

Merginal Costing

Understand the concept of marginal costing

Importance of marginal costing in decision making

Cost behavior and its relation to marginal costing

Differentiating variable costs and fixed costs

Calculation of marginal cost

Application of marginal costing in pricing decisions

Use of marginal costing in determining product profitability

Advantages of using marginal costing for shortterm decision making

Limitations of marginal costing

Comparison of marginal costing with absorption costing

Examples of companies using marginal costing for cost control and analysis.

Meaning

Marginal costing emphasizes on variable costs and contribution margin.

It helps in making shortterm decisions.

It calculates the contribution margin for each product.

It considers fixed costs as period costs.

It helps in determining the breakeven point.

It calculates the contribution margin ratio.

It does not allocate fixed overhead costs to products.

Absorption costing considers both variable and fixed costs.

It helps in valuing inventory and determining product costs.

It allocates both variable and fixed overhead costs to products.

It matches costs with revenue for each unit produced.

It complies with generally accepted accounting principles.

Difference

Treatment of fixed manufacturing overhead costs.

Marginal costing treats fixed overhead costs as period costs.

It excludes fixed overhead costs from the cost of production.

Absorption costing allocates fixed overhead costs to products.

It includes fixed overhead costs in the cost of production.

Impact on inventory valuation.

Marginal costing values inventory at variable costs only.

It does not allocate fixed costs to inventory.

Absorption costing values inventory at both variable and fixed costs.

It allocates fixed costs to inventory.

Profit determination.

Marginal costing calculates profit based on contribution margin.

It does not consider fixed overhead costs in profit calculation.

Absorption costing calculates profit based on full cost.

It includes both variable and fixed costs in profit calculation.

Advantages and Disadvantages

Marginal costing advantages.

Simplicity in decisionmaking.

Clear differentiation of fixed and variable costs.

Accurate determination of breakeven point.

Marginal costing disadvantages.

Ignoring fixed costs may lead to underestimating their impact.

Inadequate for longterm decisionmaking.

Absorption costing advantages.

Reflects the full cost of production.

Conforms to accounting conventions.

Absorption costing disadvantages.

Complex and timeconsuming.

Fixed costs may be overemphasized in decisionmaking.

Conclusion