Marginal costing is a technique that focuses only on variable costs when calculating the cost of producing a product or service. It excludes fixed costs from the calculation. Under marginal costing, inventory is valued at variable cost rather than total cost. Marginal costing is useful for decision making, determining the breakeven point, and showing the contribution margin of each product. However, it can provide misleading results by ignoring fixed costs and is not suitable for large, long-term industries.

2. marginal costing
SUBMITED TO : DR. JELSY JOSEPH
SUBMITED BY : PRIYANKA JAIN

3. Marginal Cost
• Marginal cost is a amount at any given
volume of output by which aggregate costs
are changed.
• If volume at output is increased or
decreased by additional one unit.

4. Marginal costing
• The concept of marginal costing is also known as
variable costing because it is based on the
behavior of costs that vary with the volume of
output.
• Marginal costs defines costs into two:
1. Fixed cost
2. Variable cost

5. Fixed cost & Variable cost
• Fixed cost – the expenditure remains same irrespective
of output, this includes cost which a firm has to incur
irrespective units of production. Eg : building rent
• Variable cost – variable cost varies directly with output.
It is directly proportional to volume of production. Eg:
cost of raw material

6. Example
• Manufactures 100 radio variable cost Rs 150 per
unit , fixed cost Rs 5000
variable cost = 100*150= 15000
fixed cost = 5000
• If manufactures 101 radio
variable cost = 101*150 = 15150
fixed cost = 5000
Additional cost = Rs 150

7. Features
• Fixed costs and variable cost
• Only variable costs are considered to calculate the costs
per unit of a product.
• Fixed costs are excluded in marginal costing as they are
expenses of P&L a/c.
• Useful technique for export firms.
• Selling price is determined on the basis of marginal
costs.
• Shows difference between sales and variable cost known
as contribution.

8. Advantages
• Cost control
• Helps determine breakeven point
• Decision making
• Cost reporting

9. Disadvantages
• Misleading results.
• Ignorance of time factor.
• Not suitable for long run & to huge industries.
• Fixed costs ignored in valuation of stock of WIP &
finished goods.
• Over emphasis on sales.
• Not applicable to contract costing

10. Concept of contribution
• Contribution is profit before adjusting fixed cost.
• It is an assumption that excess of sales over variable cost contributes
to a fund not only which covers fixed cost but also provides some
profit.
• If contribution = fixed cost, firm achieves breakeven.
• This concept helps to take decision like:-
1. Whether to produce or discontinue.
2. Fixing up selling price of bulk orders.
Contribution = sales –variable cost

12. Profit Volume Ratio
• It is popularly known as P/V ratio.
• It is expresses between contribution & sales.
P/V ratio = (contributionsales )* 100

13. Breakeven point
• It is that stage where firm is making no profit ,
no loss.
• Total sales revenue = total costs incurred
Breakeven point(units) = total fixed cost
contribution per unit
Breakeven point(Rs.)= (total fixed cost P/V
ratio)*100

14. Absorption Costing
• Absorption cost is a total cost technique under
which total cost ie. fixed & variable is charged to
production.
• Inventory is also valued at total cost.

15. Difference between absorption & marginal costing
BASIS ABSORPTION MARGINAL
MEANING Absorption costing is a
method costing a product in
which all fixed and variable
production costs are
apportioned to products.
Marginal costing is an
accounting system in
which variable costs are
charged to products and
fixed costs are considered
as periodic cost.
Valuation of
inventory
Values inventory at full
production cost.
Values inventory at total
variable production cost.
Effect of profit If inventory level increase,
absorption costing gives
higher profits
If inventory level decrease,
marginal costing gives
higher profits.
Treatment of fixed
manufacturing
overheads
It is treated as product
costing , as it believes that
product cannot be produced
without the resources
provided by fixed cost.
It is treated as period cost,
as it believes that only
variable cost are relevant
for decision making