Absorption and marginal costing

Two ways of deciding what a job costs. They give different answers on purpose.

What it means

Absorption costing allocates a share of fixed overheads to each unit. Marginal costing counts only variable costs and treats fixed costs as a period expense.

Why it matters

Absorption tells you whether a price covers its full share of the business. Marginal tells you whether taking the job leaves you better off than not taking it. Both are correct for different questions.

What it looks like in practice

Use absorption for setting standard prices and marginal for one-off decisions about spare capacity.

What to watch out for

Allocating overheads by a crude driver — everything shared by headcount or by revenue — which makes some jobs look profitable and others not for no real reason.

Where to get proper advice

Your accountant. This is exactly the kind of question they answer in ten minutes and most owners never ask.