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Closing stock in absorbtion costing

LAHAM (XXX) (27 Points)

25 June 2016

Why stocks under absorbtion costing are lower than stocks under marginal costing if selling quantity is more than production quantity.I mean even if the stocks decrease, why would it have more value compared to absorbtion costing method.,May i get a brief explaination.

Thank you

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2 Replies

Abhishek Jhunjhunwala (Student) (21 Points)
Replied 25 June 2016

As per Absorption Costing, the cost of a finished unit in inventory will include Direct Materials, Direct Labour, both Variable AND Fixed Overheads.

As per Marginal Costing, the cost of finished unit in inventory will include Direct Materials, Direct Labour and ONLY Variable Overhead.

Thus, the difference between Marginal & Absorption Costing is the Fixed Overhead portion.

LAHAM (XXX) (27 Points)
Replied 25 June 2016

Yes, i know that, but the stocks in ab costing would'nt reflect less value than marg. costing just because some stock is utilised for sale, i mean sale q is more than prod. q(for eg. ohs are constant for past and present period of costing)..?