Marginal costing is one of the most useful techniques available to the management. It guides the management in pricing, decision-making and assessment of profitability. It reveals the interrelationship between cost, volume of sales and profit. It classifies cost into fixed and variable and only variable costs are charged to products. It does not include fixed expenses. Marginal costing is also known as direct costing or variable costing or incremental costing.
According to ICMA, England, “Marginal cost is the amount, at any given volume of output, by which aggregate cost are changed, if the volume of output is increased or decreased by one unit”
The term BEA is interpreted in two senses. In its narrow sense, it is concerned with finding out the BEP. BEP is the point at which total revenue is equal to total cost. It is the point of no profit, no loss. In broad sense, it means a system of analysis that can be used to determine the probable profit at any level of production
All cost are classified into two – fixed and variable.
Fixed cost remain constant at all level of output
Variable cost very proportionally with the volume of output.
Selling price per unit remains constant in spite of completion or changes in the volume of production.
There will be no change in operating efficiency
There will be no change in the general price level.
Volume of production is the only factor affecting the cost
Volume of sales and volume of production are equal. Hence, there is no unsold stock
There is only one product or in the case of multiple products, sale mix remains constant.
Drawing a break-even chart £ Quantity Fixed costs Total costs Sales revenue Break-even output Break-even sales break- even point at the break-even point, total sales = total cost (i.e. no profit or loss is made) Angle of Incidence Loss