Contrast and Compare Absorption Costing With Marginal Costing Essay

Contrast and Compare Absorption Costing With Marginal Costing - Essay Example Marginal costing and absorption costing are the basic two methods of costing that are used for managerial decision making. This research paper outlines comparison and contrasting of marginal costing with absorption costing to be presented to the manager of Ball Dolbear Ltd that I recently joined as an accountant. This paper describes the meaning and basic principles of both marginal costing and absorption costing. The managerial concepts and significance of both these methods are detailed in this paper. Both absorption costing and marginal or variable costing are types of product costing systems. Absorption or full costing includes direct materials, direct labor and both variable and fixed manufacturing overhead in the product costs whereas variable costing doesn’t include manufacturing fixed costs along with direct material and direct labor (Weygandt, Keiso and Kimmel, 2005, p. 265),. Marginal costing is the basic tool that helps management in taking most appropriate decisions and understands accurate cost structures. Marginal costing or variable costing considers direct materials, direct labor and variable manufacturing overhead costs as product costs. Under marginal costing, variable costs are attributed to cost units for a fixed period and fixed costs are written off in full against the total contribution. (Lucey and Lucey, 2002, p. 296). Nigam, Nigam and Jain (2004) defined marginal costing as the costing technique that â€Å"charges only the variable costs to the cost units† (p. 398). According to CIMA terminology of marginal costing, â€Å"it is a principle whereby variable costs are charged to the cost units and fixed costs attributable to the relevant period is written off in full against the contribution of that period† (Bhattacharyya, 2005, p. 68). Cost of a unit consists only of out of pocket costs that are direct, variable or avoidable costs. These