What is the difference between Marginal cost and Marginal costing?What is the difference between marginal and absorption costing? Be sure that Marginal Cost and Marginal Costing are not the same even though sounds equivocal.
Let us have a top level overview on the difference between marginal cost and marginal costing as under so that we can avoid confusion in the terms.
Marginal cost is the cost of an extra unit or an additional unit of a product or service which could have been avoided if that unit were not produced or provided.
Marginal costing is an alternative to an absorption costing system. It is otherwise known as direct costing by Management Accountants worldwide. Only variable costs (marginal costs) are considered as a cost of sales. Fixed costs are considered as period costs and are charged in full against the profit of the period in which they are incurred.
• Another difference between marginal cost and marginal costing is that , in marginal costing scenario, ending inventories are valued at marginal (alternatively variable) production cost whereas, in absorption costing environment, inventories are valued at their full production cost which includes absorbed fixed and variable (alternatively/marginal) overhead.
• If the beginning and ending inventory levels vary, the profit reported for the accounting period under the two methods of cost accumulation will therefore be varied.
• In the long run, total profit for a company will be the equal whichever costing method is applied because, in the long run, total costs will be the same by either method of accounting. Fixed cost after a relevant range might turn into variable. Different accounting conventions merely influence the profit of individual accounting periods.
Marginal costing (otherwise known as direct or variable costing) is more useful for decision-making purposes, but absorption costing is needed for financial reporting purposes to comply with the International Accounting Standards (IAS).