Marginal costing is a technique that classifies costs as either fixed or variable. Variable costs are considered the marginal costs and are charged to each unit, while fixed costs are written off for the period. Marginal cost is calculated as direct material + direct labor + direct expenses + variable overheads. It is used to determine the additional cost of producing one more unit and to understand the impact of variable costs on output volume. Marginal costing helps with managerial decisions like product profitability or order acceptance by considering only the additional variable costs.

1. MARGINAL COSTING
BY NEELAKSHI SAINI

2. • Marginal Costing is a costing technique wherein the marginal
cost, i.e. variable cost is charged to units of cost, while the
fixed cost for the period is completely written off against the
contribution.
• The term marginal cost implies the additional cost involved
in producing an extra unit of output, which can be reckoned
by total variable cost assigned to one unit. It can be calculated
as:
• Marginal Cost = Direct Material + Direct Labor + Direct
Expenses + Variable Overheads

3. EXAMPLE• If variables costs per unit are Rs 10 and fixed expenses are Rs
1,50,000 per annum ,an output of 30,000 units per annum
results in following expenditure.
Variable cost of 30,000units @Rs 10 = 3,00,000
Fixed cost = 1,50.000
Total cost = 4,50,000
If the output is increased by 1 unit ,the following expenditure will
incurred
Variable cost of 30,001units @Rs 10 = 3,00,010
Fixed cost = 1,50.000
Total cost = 4,50,0 10
Less : Total cost for output of 3,00,000units =4,50,000
Marginal cost of I unit =10

4. Fixed cost Vs variable cost
• Fixed costs often include rent, buildings,
machinery, etc. Variable
costs are costs that vary with output.
Generally variable costs increase at a
constant rate labor and capital. Variable
costs may include wages, utilities,
materials used in production, etc.

5. Features of marginal costing
• This technique is used to ascertain the marginal cost
and to know the impact of variable costs on the volume
of output.
• All costs are classified on the basis of variability into
fixed cost and variable cost. Semi-variable costs are
segregated into fixed and variable costs.
• Marginal (i.e., variable) costs are treated as the cost of
the product or service. Fixed costs are charged to
Costing Profit and Loss Account of the period in which
they are incurred.
• Stock of finished goods and work-in-progress are
valued on the basis of marginal costs.
• Selling price is based on marginal cost plus
contribution.

6. Features of marginal cost
• Profit is calculated in the usual manner. When
marginal cost is deducted from sales it gives
rise to contribution. When fixed cost is
deducted from contribution it results in profit.
• Break-even analysis and cost-volume profit
analysis are integral parts of this technique.
• The relative profitability of products or
departments is based on the contribution
made available by each department or
product

7. Income statement of marginal cost

8. Difference between marginal cost Vs
absorption costing
1 in absorption costing all costs fixed and variable are included
for ascertaining the cost .Marginal costing only variable costs
are included. Fixed costs are recovered from contribution .
2 In absorption costing Different costs are obtained at different
levels of output because of fixed expenses remaining the
same .Marginal costing per unit will remain same at different
levels of output because variable expenses vary in the same
proportion in which output varies.
3 In absorption costing difference between sales and total cost
is profit. In marginal costing difference between sales and
marginal cost is contribution and difference between
contribution and fixed cost is profit or loss.

9. 4 absorption costing is not very helpful in taking managerial decisions
such as whether to accept the export order or not, whether to
buy or manfacture,the minimum price is to be charged during the
depression etc.in marginal costing the technique is very helpful in
taking managerial decisions because it takes into consideration
the additional cost involved only assuming fixed expenses
remaining constant.
5 costs are classified according to functional basis such as production
cost, office and administration cost and selling and distribution
cost. in marginal costing costs are classified according to the
behaviour of costs i.e fixed cost and variable cost.
6 absorption costing fails to establish relationship of cost, volume and
profit as costs are seldom classified into fixed and variable cost .in
marginal costing cost,volume,profit relationship is an integral part
of marginal cost studies as costs are classified into fixed and
variable costs.