7.3 Absorption costing VS. marginal costing
　　In absorption costing/full costing, fixed manufacturing/ production overheads are absorbed into cost units. Stock is valued at absorption cost and fixed manufacturing overheads are charged in the profit and loss account of the period in which the units are sold.
　　In marginal costing, fixed manufacturing/ production overheads are not absorbed into cost units. Stock is valued at marginal/ variable production cost. All fixed overheads, including fixed production overheads, are treated as period costs and are charged in the profit and loss account.
　　Marginal costing 　　　　　　　　　　Absorption Costing（full costing）
　　Closing inventories are valued at　　 Closing inventories are valued at
　　marginal production costs　　　　　　 full production cost
　　Fixed costs are period costs　　　　 Fixed costs are absorbed into unit cost
　　Cost of sales does not include a　　 Cost of sales does include a share of fixed
　　share of fixed overheads　　　　　　 overheads
　　Arguments in favour of absorption costing:
　　● It is “fair” to share fixed production costs between units of production as such costs are incurred in order to make output.
　　● Closing inventory valued in accordance with IAS 2 principles. Therefore, absorption costing must be used to value stock for financial statement in order to follow “match” concept by carrying forward a proportional of the production cost in the stock valuation to be matched against the sales value when the items are sold.
　　● It is easier to determine the profitability of several products by charging a share of fixed overheads to them （rather than working out if the total contribution form several products will cover fixed costs.）
　　● Where building up inventory is necessary, fixed costs should be included in inventory valuations in order to prevent a series of losses from occurring.
　　● Analysis of under/over absorption overhead is useful to identify inefficient utilization of production resources.
　　● It is quite common to price jobs or contracts by adding a profit.
　　Arguments in favour of marginal costing:
　　● Fixed costs = period costs unchanged at all output volume
　　● Closing inventory realistically valued at variable production cost per unit
　　● Absorption costing encourage management to produce goods in order to absorb allocated overheads instead of meeting market demands.
　　● Size of contribution provides management with useful information about expected profits. It is a great aid to decisions making（unlike absorption costing）
　　Profit statement
　　Under absorption costing
　　Explanation of the difference in profit
　　The difference in profit between the two costing methods is due to the deference in stock levels between the beginning and the end of the period.
　　● If stock levels are rising, AC profit > MC profit
　　● If stock levels are falling, AC profit < MC profit
　　● If opening and closing stock levels are the same, AC profit = MC profit
　　Example 5:
　　The overheads absorption rate for product X is $10 per machine hour. Each unit of product X requires five machine hours. Inventory of product X on 1.1.X1 was 150 units and on 31.12.X1 it was 100 units. What is the difference in profit between results reported using absorption costing and results reported using marginal costing?
　　A. The absorption costing profit would be $2500 less
　　B. The absorption costing profit would be $2500 greater
　　C. The absorption costing profit would be $5000 less
　　D. The absorption costing profit would be $5,000 greater
　　Solution:
　　Difference in profit = change in inventory level x fixed overheads absorption per unit = （150 units – 100 units） x 10/hour x 5 hours = $2,500
　　Since the inventory levels decreased, the absorption costing profit would be less.
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