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Difference between Marginal cost and Marginal costing

Marginal cost is the cost of one additional unit of a product/service which could be escaped if that unit were not produced/provided.


Marginal costing is an alternative to absorption costing. Only variable costs (marginal costs) are charged as a cost of sales. Fixed costs are treated as period costs and are charged in full against the profit of the period in which they are incurred.

• In marginal costing environment, closing inventories are valued at marginal (variable) production cost

whereas, in absorption costing environment, inventories are valued at their full production cost which includes absorbed fixed and variable/marginal overhead.

• If the opening and closing inventory levels differ, the profit reported for the accounting period under the two methods of cost accumulation will therefore be different.

• In the long run, total profit for an establishment will be the same whichever costing method is used because, in the long run, total costs will be the same by either method of accounting. Different accounting conventions merely affect the profit of individual periods.

 
Marginal costing is more useful for decision-making purposes, but absorption costing is needed for financial reporting purposes to comply with accounting standards.  
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