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Marginal and absorption costing, also known as variable or direct costing, is a cost accounting method used in managerial accounting to allocate and analyze costs associated with production and inventory. It differs from traditional absorption costing in the way it treats fixed manufacturing overhead costs.

Here are some key definitions related to marginal and absorption costing:

Marginal Costing: Marginal costing is a cost accounting technique where only variable production costs (direct materials, direct labor, and variable manufacturing overhead) are assigned to products. Fixed manufacturing overhead costs are treated as period expenses and are not allocated to products. This approach helps in determining the contribution margin of each product and provides insights into short-term decision-making.

Variable Cost: Variable costs are expenses that change in direct proportion to changes in production levels or sales. These costs include direct materials, direct labor, and variable manufacturing overhead. Variable costs are relevant in marginal costing as they are directly associated with producing each unit of a product.

Fixed Cost: Fixed costs are expenses that remain constant regardless of changes in production or sales volume. These costs include items like rent, salaries of permanent staff, and depreciation. In marginal costing, fixed costs are treated as period expenses and are not assigned to products, which distinguishes it from absorption costing.

Contribution Margin: The contribution margin is the difference between total sales revenue and total variable costs. It represents the portion of sales revenue available to cover fixed costs and contribute to profits. Determining the contribution margin helps in evaluating the profitability of individual products or business segments.

Absorption Costing: Absorption costing is a traditional cost allocation method that assigns both variable and fixed manufacturing overhead costs to products. This method aims to absorb all costs, both fixed and variable, into the cost of goods sold. As a result, it may lead to fluctuations in reported profits due to changes in production levels.

Fixed Manufacturing Overhead: Fixed manufacturing overhead refers to indirect production costs that remain constant regardless of the volume of units produced. These costs include items like factory rent, depreciation of manufacturing equipment, and supervisory salaries. In marginal costing, fixed manufacturing overhead costs are considered as period costs and are not included in the cost of goods sold.

Variable Manufacturing Overhead: Variable manufacturing overhead refers to indirect production costs that vary based on production levels. These costs include items like electricity usage, factory supplies, and variable labor associated with production.

Break-Even Point: The break-even point is the level of sales at which total revenue equals total costs, resulting in zero profit. It's the point where the company covers all its costs but doesn't make a profit. Marginal costing aids in calculating the break-even point by focusing on the relationship between variable costs, sales revenue, and contribution margin.

Cost-Volume-Profit (CVP) Analysis: CVP analysis is a tool used to study the interrelationships between costs, volume, and profits. It helps in understanding how changes in production volume or sales affect costs and profits. Marginal costing is particularly useful in conducting CVP analysis due to its focus on variable costs and contribution margin.

Overall, marginal absorption costing provides insights into short-term decision-making by highlighting the cost and revenue components that directly affect profitability. It's especially helpful for scenarios where production levels and sales volumes vary.