DIFFERENCE IN PROFIT UNDER MARGINAL AND ABSORPTION COSTING

 Difference in profit under Marginal and Absorption costing

The above two approaches will compute the different profit because of the dif- ference in the stock valuation. This difference is explained as follows in different circumstances.

1. No opening and closing stock: In this case, profit / loss under absorption and marginal costing will be equal.

2. When opening stock is equal to closing stock: In this case, profit / loss under two approaches will be equal provided the fixed cost element in both the stocks is same amount.

3. When closing stock is more than opening stock: In other words, when production during a period is more than sales, then profit as per absorption approach will be more than that by marginal approach. The reason behind this difference is that a part of fixed overhead included in closing stock value is carried forward to next accounting period.

4. When opening stock is more than the closing stock: In other words, when production is less than the sales, profit shown by marginal costing will be more than that shown by absorption costing. This is because a part of fixed cost from the preceding period is added to the current year’s cost of goods sold in the form of opening stock.