Marginal costing focuses on the change in costs due to fluctuations in production volume, emphasizing variable costs while treating fixed costs as constant. It aids in short-term decision-making by calculating the contribution margin, which is sales revenue minus variable costs, and ultimately determines profit. In contrast, absorption costing allocates all production costs to products, valuing unsold inventory at total cost, which can lead to issues like over/under absorption.

1. Marginal costing

2. Marginal Cost is defined as,
‘ The change in aggregate costs due to change in the volume
of production by one unit’.
• For example,
Total number of units produced -800
The total cost of production - Rs.12, 000,
• If one unit is additionally produced
the total cost of production may become Rs.12, 010
• If the production quantity is decreased by one unit
the total cost may come down to Rs.11, 990.
Change in the total cost is by Rs.10 The Marginal cost is Rs.10.
The increase or decrease in the total cost is by the same amount because
the variable cost always remains constant on per unit basis

3. Marginal Costing has been defined as,
‘Ascertainment of cost and measuring the impact
on profits of the change in the volume of output or
type of output.
This is subject to one assumption and that is the
fixed cost will remain unchanged irrespective of
the change.’

4. • helps with short-term decision-making .
• Marginal costing is not concerned with fixed period
costs
• Instead it is concerned with variable product costs
▫ Direct materials
▫ Direct labor
▫ Direct expenses
▫ And variable production overheads

5. • The contribution is the sales revenue after
marginal/variable product costs have been paid.
▫ Selling price less variable cost = Contribution
▫ Total contribution less total fixed costs = Profit
• A marginal costing statement can be prepared in
the following format:
Sales revenue x
less Variable costs (x)
equals Contribution x
less Fixed costs (x)
equals PROFIT x

6. Absorption costing
• Absorption costing (full costing), all production costs are absorbed into
products.
• The unsold inventory is measured at total cost of production. Fixed
production overhead costs are treated as a product cost.
• The absorption cost of a unit of output is made up of the following
costs:
Direct materials x
add Direct labor x
add Direct expenses x
add Production overheads (fixed and variable) x
equals ABSORPTION COST x
Note that the production overheads comprise the factory costs of indirect
materials, indirect labor, and indirect expenses.

7. Features of Marginal Costing
• In marginal costing, costs are segregated into fixed
and variable. Only variable costs are charged to the
production.
• The valuation of inventory is done at variable cost
only.
• The profitability of products or process is determined
on the basis of contribution.
• Profit is ascertained by reducing the fixed cost from
the contribution of all the products or departments or
process or division etc.

8. ADVANTAGES OF MARGINAL COSTING
1. Marginal costing is simple to understand
2. By not charging fixed overhead to cost of production,
the effect of varying charges per unit is avoided.
3. It prevents the illogical carry forward in stock valuation
of some proportion of current year’s fixed overhead.
4. Practical cost control is greatly facilitated avoiding
arbitrary allocation of fixed overhead, efforts can be
concentrated on maintaining a uniform and consistent
marginal cost. It is useful to various levels of
management.
5. It helps in short-term profit planning by breakeven
graphs and profitability analysis.

9. Disadvantages of marginal costing
1. The separation of costs into fixed and variable
is difficult and sometimes gives misleading
results.
2. Normal costing systems also apply overhead
under normal operating volume and this shows
that no advantage is gained by marginal
costing.

10. Marginal Costing VS Absorption
Costing
Absorption Costing
• Costs are classified as direct
and indirect
• The year-end inventory of is
valued at total cost.
• The fixed overhead absorption
may create some problems like
over/under absorption.
Marginal Costing
• Costs are classified as fixed
and variable.
• The year-end inventory is
valued at variable cost only.
• The fixed overheads are
charged directly to the Costing
Profit and Loss Account and
not absorbed in the product
units.

11. • Due to the inventory valuation,
the costs relating to the
current period are carried
forward to the subsequent
period. This will distort the
cost of production.
• The selling price is thus fixed
on the basis of total costs.
• Fixed costs are not taken into
consideration while valuing
the inventory and hence there
is no distortion of profits.
• Only variable costs are
charged to the cost of
production and therefore the
selling price is also based on
only variable costs.