Under this technique all costs are classified into fixed costs and variable costs. Only variable costs are considered product costs and are allocated to products manufactured. These costs include direct materials, direct labor, direct expenses and variable overhead. Fixed costs are not considered for computing the cost of products or valuation of inventory.

2. “The ascertainment, by differentiating between
fixed cost and variable cost, of marginal cost and of
the effect on profit of changes in volume or type of
output”.
Under this technique all costs are classified into fixed
costs and variable costs. Only variable costs are
considered product costs and are allocated to products
manufactured. These costs include direct materials,
direct labor, direct expenses and variable overhead.
Fixed costs are not considered for computing the cost of
products or valuation of inventory.

3. Features
Of
Marginal Costing

4. 1. This technique is used to ascertain the marginal cost and to know the
impact of variable costs on the volume of output.
2. 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.
3. 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.
4. Stock of finished goods and work-in-progress are valued on the basis of
marginal costs.
5. Selling price is based on marginal cost plus contribution.
6. 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.
7. Break-even analysis and cost-volume profit analysis are integral parts of
this technique.
8. The relative profitability of products or departments is based on the
contribution made available by each department or product.

5. Advantages
of
Marginal Costing

6. 1.The technique is simple to understand and easy to operate because it avoids the complexities
of apportionment of fixed costs which, is really, arbitrary.
2. It also avoids the carry forward of a portion of the current period’s fixed overhead to the
subsequent period. As such cost and profit are not vitiated. Cost comparisons become more
meaningful.
3. The technique provides useful data for managerial decision-making.
4. There is no problem of over or under-absorption of overheads.
5. The impact of profit on sales fluctuations are clearly shown under marginal costing.
6. The technique can be used along with other techniques such as budgetary control and
standard costing.
7. It establishes a clear relationship between cost, sales and volume of output and breakeven
analysis.
8. It shows the relative contributions to profit which are made by each of a number of
products, and shows where the sales effort should be concentrated.
9. Stock of finished goods and work-in-progress are valued at marginal cost, which is
uniform.

7. Limitations
of
Marginal Costing

8. 1. Segregation of costs into fixed and variable elements involves considerable technical difficulty.
2. The linear relationship between output and variable costs may not be true at different levels of
activity. In reality, neither the fixed costs remain constant nor do the variable costs vary in
proportion to the level of activity.
3. The value of stock cannot be accepted by taxation authorities since it deflates profit.
This technique cannot be applied in the case of contract costing where the value of work-in-
progress will always be high.
4. This technique also cannot be used in the case of cost plus contracts unless fixed costs and profits
are considered.
5. Pricing decisions cannot be based on contribution alone.
6. The elimination of fixed costs renders cost comparison of jobs difficult.
7. The distinction between fixed and variable costs holds good only in the short run. In the long run,
however, all costs are variable.
8. With the increased use of automatic machinery, the proportion of fixed costs increases. A system
which ignores fixed costs is, therefore, less effective.
9. The technique need not be considered to be unique from the point of cost control.

9. Break-Even Point

10. Break-even point represents that volume of
production where total costs equal to total sales
revenue resulting into a no-profit no-loss situation.
If output of any product falls below that point there
is loss; and if output exceeds that point there is
profit.
Thus, it is the minimum point of production where
total costs are recovered. Therefore.

12. Assumptions
Underlying
Break-Even Analysis

13. 1. All costs can be separated into fixed and variable
components,
2. Fixed costs will remain constant at all volumes of output,
3. Variable costs will fluctuate in direct proportion to
volume of output,
4. Selling price will remain constant,
5. Product-mix will remain unchanged,
6. The number of units of sales will coincide with the units
produced so that there is no opening or closing stock,
7. Productivity per worker will remain unchanged,
8. There will be no change in the general price level.

14. Uses
of
Break-Even Analysis

15. 1. It helps in the determination of selling price which
will give the desired profits.
2. It helps in the fixation of sales volume to cover a
given return on capital employed.
3. It helps in forecasting costs and profit as a result of
change in volume.
4. It gives suggestions for shift in sales mix.
5. It helps in making inter-firm comparison of
profitability.
6. It helps in determination of costs and revenue at
various levels of output.
7. It is an aid in management decision-making (e.g.,
make or buy, introducing a product etc.), forecasting,
long-term planning and maintaining profitability.
8. It reveals business strength and profit earning
capacity of a concern without much difficulty and effort.

16. Limitations
of
Break-Even
Analysis

17. 1. Break-even analysis is based on the assumption that all costs and
expenses can be clearly separated into fixed and variable
components. In practice, however, it may not be possible to achieve
a clear-cut division of costs into fixed and variable types.
2. It assumes that fixed costs remain constant at all levels of
activity. It should be noted that fixed costs tend to vary beyond a
certain level of activity.
3. It assumes that variable costs vary proportionately with the
volume of output. In practice, they move, no doubt, in sympathy
with volume of output, but not necessarily in direct proportions..
4. The assumption that selling price remains unchanged gives a
straight revenue line which may not be true. Selling price of a
product depends upon certain factors like market demand and
supply, competition etc., so it, too, hardly remains constant.

18. 5. The assumption that only one product is produced or that
product mix will remain unchanged is difficult to find in practice.
6. Apportionment of fixed cost over a variety of products poses a
problem.
7. It assumes that the business conditions may not change which is
not true.
8. It assumes that production and sales quantities are equal and
there will be no change in opening and closing stock of finished
product, these do not hold good in practice.
9. The break-even analysis does not take into consideration the
amount of capital employed in the business. In fact, capital
employed is an important determinant of the profitability of a
concern.