Marginal cost is the additional cost of producing one more unit. It varies with output and includes variable costs and a share of fixed overhead costs. Marginal costing is a technique that separates total costs into fixed and variable costs. Only variable costs are treated as product costs for inventory valuation and profit calculation. Fixed costs are subtracted from the contribution margin to determine profit. Absorption costing treats both fixed and variable costs as product costs. Contribution is sales revenue minus variable costs and shows how much can contribute to fixed costs and profit. Break-even analysis determines the sales volume needed for total revenues to equal total costs, the point of no profit or loss.

2. WHAT DO YOU MEAN BY MARGINAL COST?
Marginal cost is the additional cost of producing an
additional unit of a product. It is the amount by which
total cost increase when one extra unit is produced or
the amount of cost, which can be avoided by producing
one unit less.
WHAT ARE THE FEATURES OF MARGINAL COST?
It is usually expressed in terms of one unit
It varies proportionate to variation in output
It is charged to operations, processes or products
It is the total of prime cost plus variable overheads of
one unit.

3. WHAT DO YOU MEAN BY MARGINAL COSTING?
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 inter-
relationship between cost, volume of sale and profit.
WHAT ARE THE FEATURES OF MARGINAL COSTING?
All costs are classified into two- fixed and variable
Only the variable costs (marginal costs) are treated as the cost of
product.
The stock of finished goods and work-in-progress are valued at
marginal cost only.
Fixed costs are charged against the contribution earned during the
period.
Prices are based on marginal cost plus contribution. Contribution is
the difference between selling price and variable cost.

4. WHAT IS ‘ABSORPTION COSTING’?
Absorption costing, also known as total costing or
historical costing or full costing, is a costing technique in
which all manufacturing costs, variable and fixed, are
treated as cost of production and are used determining the
cost of goods produced and inventory valuation. All
manufacturing costs are fully absorbed into finished
goods.
WHAT DO YOU UNDERSTAND BY CONTRIBUTION?
Contribution is the difference between sales and variable
cost or marginal cost of sales. Contribution enables to
meet fixed cost and add to the profit. Contribution is also
known as gross margin. Fixed costs are converted by
contribution, and the balance amount is an addition to the
net profit.

5. WHAT DO YOU UNDERSTAND BY THE TERM
‘BREAK EVEN ANALYSIS’?
Break even analysis is a method of cost volume profit
analysis widely used in practice. Breakeven analysis is
used in two sense-in narrow sense and in broad sense.
In narrow sense, it refers to a technique of determining
that level of operation where total revenues equal the
total expenses i.e., the point of no profit no loss. In this
broad sense, break even analysis refers to the study of
relationship of cost volume and profit at different level
of activities.

6. Fixed Cost:
Fixed cost is those cost, which do not change with changes
in the volume of level of activity within the limits of plant capacity.
It depends upon the passage of time and does not vary directly with
the volume of output. Hence, even if there is no production for a
particular period, the usual amount of fixed expenses will be
incurred. Fixed cost is also known as period cost or stable or stand
by cost.
Variable Cost:
The term variable cost is defined by ICWA, England “ A
cost which in the aggregate tends to vary in direct proportion to
changes in the volume of output or turnover”. The term such as
variable cost, marginal cost, production cost, etc. ,“ are
synonymously used by cost accounts to mean the same this.
“though marginal cost and variable cost are used to mean the same,
marginal costs is expressed for one unit of output which as the term
variable cost is used for the aggregate amount of variable
expenditure for the entire production.

7. Profit Volume Ratio (PV Ratio):
Profit volume ratio, which is popularly known as PV
ratio, explains the relationship contribution to sale another
name for this contribution Sales ratio or marginal income
ratio or marginal or reliable profit ratio. This ratio is
expressed as a percentage, indicates the relative
profitability of different product.
Profit Volume Ratio = Contribution x 100
Sales

8. Margin of Safety:
Margin of safety is the excess of sales over break
even sales. It is the margin or range at which the concern
is safe from the point of view of profit. The length of
margin and safety measures the degree of profitability of
an organization. The higher the margin of safety, the more
is the profitability of the concern. A low margin indicates
low profitability. Therefore management strives to widen
the gap between sales and break even sales.
Margin of Safety = Present sales – Break even sales
(or)
MOS = Profit / Profit Volume Ratio

9. Breakeven point:
If we divide the term into three words, then it does
not require further explanation. Break-divide, even-equal,
point-place or position. Breakeven point refers to the
point where total cost is equal to total revenue. It is a point
of no profit, no loss. This is also a minimum point of
production where total costs are recovered. If sales go up
beyond the Bread-even point, the organization makes a
profit. If they come down, loss is increased.
(i) BEP (in units) = Fixed expenses x 100
Contribution per unit
(ii) BEP (in Rs) = Fixed Expenses x 100
Contribution