Marginal costing and absorption costing are two methods of calculating the cost of a product or service. These methods can be used to determine the price at which a product should be sold or to evaluate the profitability of a business.

Marginal costing involves calculating the variable costs associated with producing a product or providing a service and adding a markup to determine the selling price. Variable costs are those costs that change in relation to the number of units produced, such as the cost of raw materials or the wages of production workers. Fixed costs, such as rent and insurance, are not included in the calculation of the selling price using marginal costing.

An example of marginal costing would be a bakery that produces cookies. The bakery would calculate the cost of the flour, sugar, and other ingredients needed to make the cookies, as well as the wages of the workers who mix and bake the cookies. These costs would be added together and a markup would be added to determine the selling price of the cookies.

Absorption costing, on the other hand, involves calculating the total cost of producing a product or providing a service, including both variable costs and fixed costs. The selling price is determined by dividing the total cost by the number of units produced.

An example of absorption costing would be a car manufacturer that produces automobiles. The cost of producing each car would include the cost of the materials and labor needed to build the car, as well as the fixed costs of the factory, such as rent and insurance. The total cost would be divided by the number of cars produced to determine the selling price of each car.

Both marginal costing and absorption costing have their advantages and disadvantages. Marginal costing is useful for quickly determining the selling price of a product and can help a business to make decisions about which products to produce. However, it may not accurately reflect the true cost of producing a product, as it does not include fixed costs.

Absorption costing, on the other hand, provides a more accurate picture of the cost of producing a product, as it includes both variable and fixed costs. However, it may not be as useful for making quick pricing decisions, as it requires more detailed calculations.

In conclusion, marginal costing and absorption costing are two methods of calculating the cost of a product or service. Marginal costing involves calculating only the variable costs of production, while absorption costing includes both variable and fixed costs. Both methods have their advantages and disadvantages and can be used in different situations depending on the needs of the business.