The Choice — Absorption or Marginal Costing?

Abstract

After absorption costing had held sway for many years its basic principle — that the total actual cost of each cost unit was essential information — was challenged by advocates of marginal costing who maintained that the needs of management would be better served by the substitution of marginal costing. This claim was received with a mixture of caution, scepticism and open hostility. Some writers postulated that the main use of marginal costing was to provide information to assist in reaching decisions which varied in nature and were of the ‘once only kind’. They contended that such information should be ascertained by ad hoc investigation only, rather than by incorporation into the routine costing system. What was probably not fully realised when the pros and cons of the rival concepts were first debated was the way in which the issues were affected by the choice made between a separate pair of rival techniques, viz, actual cost ascertainment versus variance accounting (or budgetary control and standard costing as the latter technique was then termed). The arguments for and against marginal costing when actual cost ascertainment applies are not the same as the arguments which are valid when the system features variance accounting.