Marginal Costing and Absorption Costing

Learning Objectives

§  To understand the meanings of marginal cost and marginal costing

§  To distinguish between marginal costing and absorption costing

§  To ascertain income under both marginal costing and absorption costing

Introduction

The costs that vary with a decision should only be included in decision analysis. For many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time, fixed costs are not relevant to the decision. This is because either fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term.