Question

Assessment 2 2.2 Compare and contrast on inventory valuation and profit determination between Absorption and Marginal Costing using the template below: (E3:3.2) (8 MARKS) MARGINAL COSTING ABSORPTION COSTING Inventory Valuation Profit Determination 2.3 Evaluate any two benefits / advantages each of absorption and marginal costing (E3:3.3) (8 MARKS) Benefit/ MARGINAL COSTING ABSORPTION Advantage COSTING

Answer 1

	Marginal Costing	Absorption Costing
Inventory Valuation	Under Marginal costing, only variable costs are applied to inventory. So the inventory doesn't include any amount pertaining to fixed element of cost	Fixed costs are proportionately applied along with variable costs to units. Hence inventory includes fixed as well as variable cost
Profit Determination	Contribution Margin method is used. First variable costs are deducted from sales value to determine contribution from units sold. Then the fixed costs during the period (ie of both units sold as well as units in inventory) is deducted from such contribution to arrive at profit.	Both fixed and Variable costs incurred on production are systematically apportioned between units sold and in inventory. Thus both fixed and variable costs incurred on selling the products area only deducted from the sales values to arrive at the profit .

Advantages of

A. Marginal Costing:

1. It is very simple concept and easy to understand since it does not have any complexities like apportionment of costs.
2. All fixed costs of the current period are applied to current periods income. Hence no complexity of carry forward of share of portion of fixed costs.

B. Absorption Costing:

1. More realistic method as costs are apportioned on the basis of Units and not periods.
2. Accepted method under GAAP and pretty much structured.