Difference between Marginal and Absorption Costing

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The main difference between marginal (variable) costing and absorption costing techniques are given below:

Marginal Costing (Variable Costing) Absorption Costing
(1) Marginal cost is often used in decision making process. Absorption costing is used for external reporting.
(2) Inventories are valued at variable cost of production. Inventories are valued at total production cost so their values are higher in absorption costing than in marginal costing.
(3) Use of marginal costing for inventory valuation is not allowed under accounting standards. Absorption costing can be used for inventory valuation under International Accounting Standards 2.
(4) Marginal costing does not consider fixed production overheads for product costing so the problem of arbitrary apportionment of production overheads does not arise. In absorption costing fixed factory overheads are arbitrarily apportioned among the cost centers which often results in over or under absorption of overheads.
(5) In marginal costing fixed costs are fully changed against the relevant year profit. In absorption costing inventories are valued at total production cost so cost of sales in a period includes same fixed overheads incurred in the previous period (i.e., in opening inventory) and will exclude some fixed overheads incurred in current period but carried forward in closing inventory as a charge against profits of future periods.