Marginal costing v Absorption costing Flashcards
Benefits of marginal costing
Allows managers to calculate contribution per unit
Used for break-even calculation
Used with make or buy decisions, additional work etc
Limitations of marginal costing
Does not ensure full cost recovery, no fixed costs
Mark-up higher than absorption costing or ABC
Not acceptable for standards of inventory valuation
Why does absorption costing provide a higher figure for inventory than Marginal?
Because it includes production overheads = higher profit but also higher tax
Benefits of absorption costing
Ensures full cost recovery, includes fixed costs
Lower markup than marginal costing
Acceptable under standard of valuation of inventories
Limitations of absorption costing
Apportionment may not be accurate from service depts
OAR inaccurate if figures for overheads are inaccurate
Labour hours or machine hours may not be relevant
Improvements in tech may phase labour out
Break-even cannot be used, neither can contribution per unit
