Absorption Costing
- In absorption costing the classification of expenses is based on functional basis whereas in marginal costing it is based on the nature of expenses.
- In absorption costing, the fixed expenses are distributed over products on absorption costing basis that is, based on a predetermined level of output.
- Since fixed expenses are constant, such a method of recovery will lead to over or under-recovery of expenses depending on the actual output being greater or lesser than the estimate used for recovery.
- This difficulty will not arise in marginal costing because the contribution is used as a fund for meeting fixed expenses.
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