Inventory consists of assets to organisation. In the normal business environment it is there to sold to market.In the second category the throughput methods inventory gets ready to sell In the third alternative for the production of materials raw materials to the production material stays inside inventory.
Marginal costing is the cost incurred for inventory. Inventory consists of above three processes. Thus it might consists of more than one production unit.
Absorption costing is the cost incurred to all production units. Variable costs vary with costs. It varies with the volume of a production unit or attached services. If at all any point of time there is no production volume or services then the question of variable costs diminishes.
Under marginal costing which relates to cost differences the variable cost is applicable there. While calculating marginal costing only variable costs in terms of productivity and services is applicable.
Fixed overhead costs are opposite to variable costs and they do not vary remains constant. Management beforehand decides about the total aggregation of variable costs. From it, the constitution of contribution margin such as product price is made of. It minuses the variable costs to inventory in marginal costing. It includes fixed overheads plus contribution margin.
In absorption costing fixed overhead costs are applicable. While calculating total profits of the product, if it is going through marginal costing then it appears higher as the minuses of variable costing is not performed. While calculating profits under absorption costing, the fixed overhead minuses available costs so profit appears lower in this case.
Under marginal costing overhead costs are charged as expenses, in the case of absorption costing they are charged under products. Marginal costing is for internal management purposes they are not significant to show in accounting frameworks.
Absorption costing is included in financial reporting as it includes direct labor and direct materials that show how much exact amount is spent for productivity. Marginal costing includes factory overheads that do not include a practical production process that includes direct labour and direct materials of different units.
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