BBA II

1. Marginal Costing

2. Marginal Costing
 A method that considers only the
variable costs as cost of production,
leaving out period costs to be absorbed
from the marginal contribution.

3. Income Statement under M.C :
Particular Rs. Rs.
Sales ----
Less: Variable Manufacturing cost
Direct Material ---
Direct Labour ---
Direct Expenses ---
Variable Factory Overheads ----
Selling and distribution expenses --- ----
contribution ----
Less: fixed costs
Manufacturing Overheads ---
Administration Overheads ---
Selling and distribution overheads --- ---
net income or profit ----

4. Example
 A company is manufacturing two products A & B. the
cost of their manufacture is as follows :
the total factory overheads are rs 12000 out of which
rs 6000 are fixed and rest are variable. It was
decided to apportion these costs over different
production in the ratio of output.
A B
Direct Material per unit Rs 5 Rs 4
Direct Labour Rs 3 Rs 2
Selling price Rs 20 Rs 15
Output 2000 units 1000 units

5. Conti..
 You are required to prepare a statement
showing cost and profit of each product
according to marginal costing assuming
the units sold of the product of A is 1800 &
B is 900 units.
 Selling & Distribution overheads (all fixed)
amounted to rs 9000 to be apportioned
into ratio of 2:1.

6. Absorption Costing
 Cost which are not affected by temporary
fluctuations in activity of an enterprise .e.g
interest , insurance, administration,
expenses, etc…
 Absorption costing is also known as "full
absorption costing".

7. Meaning :
 Absorption costing means that all of the
manufacturing costs are absorbed by the units
produced. In other words, the cost of a
finished unit in inventory will include direct
materials, direct labor, and both variable and
fixed manufacturing overhead. As a result,
absorption costing is also referred to as full
costing or the full absorption method.

8. Distinction between absorption
costing and marginal costing
 1.Treatment of fixed and variable costs-In
marginal costing ,only variable costs are
charged to product cost. fixed cost to P/L
a/c of the period .
 IN absorption costing all
costs(both fixed and variable)are charged
to product .the fixed factory overhead is
absorption in units produced at a rate pre-
determined on the basis of normal capacity
utilisation(and not on the basis of actual
production)

9. Dif.
 2-valuation of stock –in marginal costing
,stock of work-in-progress and finished
goods are valued at marginal cost only.
 in absorption costing
,stocks are valued at total cost which
inclueds both fixed and variable costs. Thus
stock values in marginal costs are lower
than that in absorption costing.

10. Dif.
 3-Measurment of profitability: In marginal
costing ,relative profitability of products or
departments is based on a study of relative
contribution made by respective products
or departments. The marginal decisions
are thus guided by contribution.
 In absorption costing,
relative profitability is judged by profit
figures which is also a guiding factor for
managerial decisions.

11. References/Sources
 Accounting for Managers by Dr. Sakshi Vasudeva Galgotia
Publishing Company Chapter 21 Marginal Costing and Decision
Making page no. 697

12. Thank U