An alternative to absorption costing is marginal costing . Under this technique only variable costs are changed as product costs and included in inventory valuation. Fixed manufacturing costs are not allowed to products but are considered as sand thus charged directly to profit and loss account of the year. Fixed cost also do not enter in stock valuation. Both absorption costing an marginal costing treat on manufacturing costs

2. TRADITIONAL/CONVENTIONAL/
FULL COSTING
 This is a total cost technique under which total cost [i.e. fixed cost as well as variable cost] is
charged as production cost.
 In other words the absorption costing ,all manufacturing cost are absorbed in the cost of the
products produced .
 In this system the factory overhead are absorbed on the basis of a predetermined overhead
rates , based on normal capacity.
 Absorption costing approach is same as used in cost sheet

3. Advantages of
absorption costing
 simple and most commonly used
technique to ascertaining cost
 Ensures that all costs including fixed
and variable related production are
charged to products processes or
operations.
 Ensures correct fixation of selling
prices in long run as fixed costs
Disadvantages of
absorption costing
 Preparing flexible budgets under
absorption costing is not possible
 Comparison and cost control becomes
difficult when output level change with
cost per unit
 Not helpful in taking some managerial
decisions like accept or reject
decisions ,make or buy decisions
close or shut down decisions etc

4. MARGINAL COST
 Marginal cost is the additional cost of producing an additional unit of product.
 It is the total of all variable costs. it is composed of all direct costs and variable costs .
 An important point is that marginal cost per unit remains unchanged ,irrespective of
the level of activity.

6. VARIABLE COSTING
/DIRECT COSTING
 An alternative to absorption costing is marginal costing .
 Under this technique only variable costs are changed as product costs and included in
inventory valuation.
 Fixed manufacturing costs are not allowed to products but are considered as sand
thus charged directly to profit and loss account of the year.
 Fixed cost also do not enter in stock valuation.
 Both absorption costing an marginal costing treat on manufacturing costs [i.e.
administration, selling and distribution overheads ]as periods costs.

7. Advantages of
marginal costing
 Helps in cost control
 Helps management in production
planning
 Facilitates study of relative profitability
 Profit planning
 Management reporting
Disadvantages of
marginal costing
 All cost are not divisible into fixed and
variable
 Based upon the assumptions which
may not hold good under all
circumstances
 Selling prices do not remain constant
for ever
 Marginal costing completely ignores
time factor

8. DIFFERENCE B/W ABSORPTION
COSTING AND MARGINAL
COSTING
 Total cost [ fixed and variable ] is
charged to the cost of products
 Fixed cost is included in the cost of
products
 Opening and closing stocks are valued
at total cost which includes fixed as
well as variable cost
 Profitability is measured by profit
earned by various products or
departments
 Only variable cost is charged to
products
 Fixed cost is not included in the cost of
products
 Stocks are valued only at variable
costs
 Profitability is judged by the
contribution made by the various
products and departments

9. ABSORPTION
COSTING

10. MARGINAL
COSTING

11.  Differential costing is the increase or decrease in total cost or the change in specific
elements of cost that result from any variation in operations.
 It’s the difference between the cost of two alternatives decision.
 Change in cost due to ;-
 a. change in activity.
 b. change in level of activity.

12. DIFFERENCE B/W
DIFFERENTIAL COSTING AND
MARGINAL COSTING
 Differential costing is the difference
between the cost of two alternatives
decisions or of a change in output
levels
 The purpose of differential costing is to
evaluate the most suitable option
between alternatives
 Cost of two scenarios are compared
and the less costly alternative is
selected
 Marginal costing considers the change
in the costs in order to produce an
additional unit of output
 The purpose of marginal costing is to
evaluate whether it is beneficial to
produce an additional unit /small
number of additional units
 Marginal cost is with marginal revenue
to calculate the impact of a decision