This document provides an overview of marginal costing. It defines marginal costing as a technique that differentiates between fixed and variable costs to determine the effect of changes in volume or output on profit. Marginal cost is defined as the additional cost of producing one more unit. The key features, assumptions, and advantages of marginal costing are outlined, including how it is used for decision making, cost control, and determining profitability. Formulas for calculating break-even point, margin of safety, and other metrics using marginal costing are also presented.

1. MARGINAL COSTING
Submitted By:
Ambarish Mishra
Prajjwal Sharma
Mukesh kumar
Kamlesh Kumar

2. Marginal Costing
Introduction:
Marginal costing is a technique of costing fully oriented
towards managerial decision making and control.
Marginal Costing being a technique can be used in
conjunction with any method of cost ascertainment. It
can be used in combination with other techniques
such as budgeting and standard costing.
Marginal costing is helpful in determining the
profitability of products, departments, processes and
cost centers.

3. Definition of Marginal Cost
Marginal cost is the additional cost of producing an
additional unit of a product.
According to I.C.M.A. London as ”the amount to any
given volume of output by which aggregate costs are
changed if the volume of output is increased or
decreased by one unit”. In practice, this is measured by
the total variable cost attributable to one unit.
Thus, Marginal Cost = Prime cost+ Total variable
overheads
(or)
Total cost – Fixed cost.

4. Marginal Costing:
Marginal costing is defined by, I.C.M.A. as
“the ascertainment of marginal cost and of
the effect on profit of changes in volume or
type of output by differentiating between
fixed costs and variable costs.

5. Features of Marginal Costing
1.Marginal costing is a technique of control or decision making.
2. Under marginal costing the total cost is classified as fixed and
variable cost.
3. Fixed costs are treated as period cost and charged to profit and
loss a/c for the period for which they are incurred.
4. The Variable costs are regarded as the costs of the products.
5. The stock of finished goods and work-in-progress are valued at
marginal costs only.
6. Prices are determined on the basis of marginal cost.

6. Advantages of Marginal Costing
1. Simplicity
2. Stock valuation
3. Meaningful reporting
4. Fixation of Selling Price
5. Profit planning.
6. Cost control and cost reduction.
7. Pricing policy.
8. Helpful to management.
9. Production Planning
10. Make or Buy Decisions

7. Limitations of Marginal Costing
1. Classification of cost
2. Not suitable for external reporting.
3. Lack of log-term perspective.
4. Under valuation of stock
5. Automation – Lack of Advancement
6. Production aspect is ignored.
7. Not applicable in all types of business.
8. Misleading picture -Assumptions

8. Assumptions of Marginal Costing
 All costs can be classified into two categories – Fixed
and Variable
 Fixed costs remain constant at all levels of activity
 Variable costs vary in total, but remain constant per
unit
 Level of efficiency of operations is uniform
 Product risk remains unaltered, unless specified
otherwise.
 Selling price remains constant at different levels of
activity.

9. Cost-Volume-profit analysis
The term ‘contribution’ mentioned in the formal definition
is the term given to the difference between Sales and
Marginal cost. Thus
MARGINAL COST =VARIABLE COST DIRECT
LABOUR
+DIRECT MATERIAL+DIRECT EXPENSE+
VARIABLE OVERHEADS
CONTRIBUTION SALES - MARGINAL COST
The term marginal cost sometimes refers to the marginal
cost per unit and sometimes to the total marginal costs
of a department or batch or operation. The meaning is
usually clear from the context.

10. MARGINAL COST STATEMENT
Particulars Rs Rs
Sales xxxxx
Less: Variable Expenses (xxxx)
Contribution xxxxx
Less Fixed Cost (xxxx)
Marginal Costing Profit xxxxx

11. Breakeven Analysis
Introduction
 In this lesson, we will discuss in detail the
highlights associated with cost function and cost
relations with the production and distribution system of
an economic entity.
To assist planning and decision making, management
should know not only the budgeted profit, but also:
the output and sales level at which there would neither
profit nor loss (break-even point)
the amount by which actual sales can fall below the
budgeted sales level, without a loss being incurred (the
margin of safety)

12. Breakeven Analysis Equations
Sales – Marginal cost = Contribution ......(1)
Fixed cost + Profit = Contribution ......(2)
Sales – Marginal cost = Fixed cost + Profit......
(3)
P/V Ratio (or C/S Ratio) =Contribution/Sales.....
(4)
(or)
 Contribution = Sales x P/V ratio...... (5)
(or)
 Sales =Contribution/ P/V Ratio......(6)

13. Important Formula…
1. Contribution = Sales (Volume/Per unit) – Variable Cost.
2. Profit-Volume Ratio= Contribution/ Sales
(or) P/V Ratio= Change in Profit/Change in Sales
3. Break Even Point (Units) = Fixed Cost/ Contribution
Break Even Point (Sales)= Fixed Cost/ P/V Ratio
4. Margin of safety = Actual Sales – Break Even Sales
5. Sales for required profit= Fixed Cost + Required Profit
P/V Ratio
6. Profit for given Sales= Contribution-Fixed Cost
Contribution= Given Sales x P/V Ratio
7. Fixed Cost = Contribution - Profit