The document provides an overview of marginal costing techniques. It defines key terms like marginal cost, fixed cost, and variable cost. It explains the differences between absorption costing and marginal costing. Absorption costing includes both fixed and variable costs when calculating product costs, while marginal costing only includes variable costs and separates fixed costs. This treatment of costs helps marginal costing better aid in decision making by distinguishing relevant variable costs from irrelevant fixed costs.

1. Notes by Prof. M. B. Thakoor
MARGINAL COSTING
SYNOPSIS
(1) INTRODUCTION OF IMPORTANT TERMS
1) Marginal Cost
2) Marginal Costing
3) Fixed Cost
4) Variable Cost
5) Semi Variable / Semi Fixed Cost
(2) TECHNIQUES OF COSTING
1) Absorption Costing
2) Marginal Costing
(3) CONCEPT OF BREAK EVEN POINT
(4) CONCEPT OF PROFIT VOLUME RATIO
(5) PRACTICAL APPLICATIONS OF MARGINAL COSTING
TECHNIQUES
1) Pricing of Product
2) Make or buy decision
3) Operate or shutdown
4) Decision of Product Mix
5) Key or Limiting Factor
a) Labour Shortage
b) Material Shortage
c) Machine Capacity constraint
(Capacity Utilisation)
(6) PROFIT PLANNING
(7) EXPANSION AND DIVERSIFICATION
(8) ACCEPT, REJECT SPECIAL OFFER AND SUBCONTRACTING.
(1) Notes by Prof. M. B. Thakoor

2. Notes by Prof. M. B. Thakoor
Marginal Costing also known as Direct Costing or Variable Costing. The
word Marginal Costing is common in the U.K. and other Countries of the
Continent, while the expression “Direct Costing” or “Variable Costing” is
preferred in the U.S.A.
“Marginal Cost” is derived from the word “Margin” and is well known
concept of Economic theory. Thus quite in the Economic Connotation of the
term, it is described in simple words as “the cost which arises from the production
of additional increment of output and it does not arise in case the additional
increments are not produced.”
"The amount at given volume of output by which aggregate cost are
changed if the volume of output is increased or decreased by one unit.”
Marginal Costing is the ascertainment of Marginal Cost by differentiating
the cost between fixed cost and variable cost and finding its effect on the profit of
changes in volume or type of output.
Marginal Costing necessitates Analysis of cost into fixed and variable.
Even semi variable costs have to be closely and critically analysed into Fixed and
variable.
INTRODUCTION:
“Marginal Cost” is derived from the word “Margin” and is well known concept of
Economic theory. Thus quite in tune with the Economic connotation of the term, it is
described in simple words as “Cost which arises from the production of additional
increment of output and it does not arrive in case the additional increments are not
produced.”
Q.1 What is Marginal Cost?
A. Marginal Cost is the amount at any given volume of output by which the
aggregate cost change, if the output is increased or decreased by 1 unit.
(2) Notes by Prof. M. B. Thakoor

3. Notes by Prof. M. B. Thakoor
Q.2 What is Marginal Costing?
A. Marginal Costing is a technique of costing which ascertains the effect of change in
volume on the profits of the company, by dividing the cost into fixed and variable.
Q.3 What is Fixed Cost?
A. Fixed Cost is a cost which remains fixed irrespective of the level of production.
Fixed Cost remain fix in total but changes per unit.
Q.4 What is Variable Cost?
A. Variable Cost is a cost which varies as per the level of production. Variable Cost
remain fixed per unit but it varies in total.
Q.5 What is Semi-Fixed / Semi-Variable Cost?
A. Semi-Fixed / Semi-Variable Cost are basically fixed cost upto a certain level of
activity specified and they vary after certain level.
Ex. Maintenance expenditure to a certain level is fixed if production do not
fluctuate widely. And if production rises beyond a fixed limit additional
maintenance expenditure is required though such additional expense may not vary
directly with production. Eg. Telephone Expenses.
Q.6 What is the basic theme of Marginal Costing ?
A. The concept of Marginal Costing is based on the important distinction between
product cost which is related to volume of production and period cost which is
related to period of time and not volume of production.
This it is based on making a distinction of cost into variable and fixed.
(3) Notes by Prof. M. B. Thakoor

4. Notes by Prof. M. B. Thakoor
TECHNIQUES OF COSTING
ABSORPTION COSTING MARGINAL COSTING
1. FORMAT OF STATEMENT
Cost Statement / Cost Sheet Marginal Cost Statement
for the year ended
Raw Material Cost xxx Sales Revenue xxx
Add: Direct Labour Less: Variable Cost of Goods
Sold
Add: Direct Expenses xxx 1. Direct Material xxx
PRIME COST xxx 2. Direct labour xxx
Add: Works Overhead xxx 3.Direct Expenses xxx
GROSS WORKS COST xxx 4. Variable Fy. OH
(if any) xxx
Add: Opening W.I.P. xxx 5. Variable Admn. OH (if
any) xxx
xxx 6.Variable S/D. OH xxx xxx
Less: Closing W.I.P. xxx CONTRIBUTION xxx
xxx Less: Fixed Cost
Less: Sale of Scrap xxx 1. Factory OH. xxx
NET WORKS COST xxx 2.Office & Admn. xxx
Add: Office & Administration 3. Selling & Dis.OH xxx
overheads xxx
a) Fixed expenses xxx PROFIT xxx
b) Variable expenses xxx xxx
COST OF PRODUCTION OR xxx
COST OF GOODS PRODUCED
Add: Op. Stock of F.G. xxx
xxx
Less: Closing Stock of F.G. xxx
COST OF GOODS PRODUCED xxx
AND SOLD
Add: Selling & Distribution
overheads
a) Fixed Exp. Xxx
b) Variable Exp. Xxx xxx
COST OF SALE xxx
Add : PROFIT xxx
Sale xxx
(4) Notes by Prof. M. B. Thakoor

5. Notes by Prof. M. B. Thakoor
ABSORPTION COSTING MARGINAL COSTING
2. DATA PRESENTATION
Data is presented in the form of Vertical Data is presented in the form of vertical
Statement. One of them being Cost Sheet statement known as Marginal Cost
where Net Profit of each product is Statement where the cost data presented
determined after subtracting Fixed Cost highlights the contribution of each
along with the Variable Cost. product and the fixed cost is deducted
from the total contribution to get profit.
The Simple principle used =
Cost + Profit = Selling price The Simple principal used =
Sales – Cost = Profit.
3. TYPE OF COST
Both Fixed and Variable Cost are considered Only Variable Costs are considered for
to find the cost of the product. finding the Marginal Cost.
4. INVENTORY VALUATION
Under Absorption Costing Inventory is Under Marginal Costing inventory is
valued at Factory Cost which include factory valued at Variable Cost and no part of
overheads both Fixed and Variable. A part Fixed Cost is applied to the inventory.
of production overhead is therefore carried
to the next accounting period along with
W.I.P. and finished goods.
5.IMPACT OF INVENTORY VALUATION ON PROFIT
a) No opening and no closing stock i.e. Production = Sale
Profit is same as Marginal Costing. Profit is same as absorption Costing
b) When Closing Stock is more than Opening Stock.
Profit will be more than Marginal Costing Profit will be less than Absorption
Costing.
Logic: Because Under Absorption Costing a portion of fixed cost is charged to the
closing stock and the same is deducted from cost so cost decreases hence profit
increases.
c) When Closing Stock is less than Opening Stock.
Profit will be less than Marginal Costing Profit will be more than Absorption
Costing.
Logic: Under Absorption Costing a portion of fixed cost is charged to opening stock
which is added to cost and its impact is greater than closing stock. So cost increases
and profit decreases of the Business organizations.
6. AID IN DECISION MAKING
As both Fixed are variable cost are As it classify cost as per variability it do
considered and it do not recognize the help in decision making considering the
difference between Fixed Cost and Variable Relevance of certain cost and
Cost it do elaborately explain past profit / irrelevance of certain cost.
losses but do not help when it comes to
tomorrows result. It considers all cost are
Relevant Cost.
(5) Notes by Prof. M. B. Thakoor

6. Notes by Prof. M. B. Thakoor
RECONCILIATION OF RESULTS OF ABSORPTION COSTING AND
MARGINAL COSTING
When results of Absorption Costing and Marginal Costing are compared it is necessary to
make adjustments for under absorbed overhead and / or over Absorbed overheads.
Because under absorption costing fixed overhead rate is predetermined based on normal
level of activity.
When actual activity level is different from normal activity level, a situation of under
absorption or over absorption of fixed cost arises.
(1) Under Absorbed = Normal Prod. – Actual Prod X Fixed Overhead
Fixed Overhead Level Level rate per unit
The above amount is reduced from profit under Absorption Costing or the above amount
is added to the cost under Absorption Costing before comparing profit with Marginal
Costing.
(2) Over Absorbed = Actual Prod. – Normal Prod X Fixed Overhead
Fixed Overhead Level Level rate per unit
The above amount is added to profit under Absorption Costing or the above amount is
deducted from the cost of production under absorption costing before comparing profit
with Marginal Costing.
Conclusion:
Process of Marginal Costing
First find the difference between sale and variable cost i.e. Excess of sale over variable
cost and this difference is known as contribution. The excess of contribution over Fixed
Cost is profit. The emphasis is on increasing the total contribution.
Sales – Variable Cost = Contribution
Contribution – Fixed Cost = Profit
(6) Notes by Prof. M. B. Thakoor

7. Notes by Prof. M. B. Thakoor
Problems:
Q.1: Following cost data is given for a production of N & Co. Ltd.
Particulars Per Unit (Rs.)
Sale Price 10
Variable Cost 6
Fixed Cost 2
Normal Production 26,000 units
Following additional data are given for the four consecutive periods.
Particulars Period I Period II Period III Period IV
(Units) (Units) (Units) (Units)
Opening Stock - - 6,000 2,000
Production 26,000 30,000 24,000 30,000
Sales 26,000 24,000 28,000 32,000
Closing Stock 6,000 2,000 -
Prepare a statement showing the profit for different period under both Marginal Costing
Method and Absorption Costing Method.
Q.2: Sale Price Rs. 5.00 per unit
Variable Cost Rs. 3.00 per unit
Fixed Cost Rs. 1.00 per unit
Normal Production 15,000 units
Total Fixed Cost for the year Rs. 15,000
Following statement shows the position of opening and closing stock.
Particulars Period I (Units) Period II (Units)
Opening Stock - 3,000
Production 17,000 14,000
Sale 14,000 16,000
Closing Stock 3,000 1,000
Prepare statement showing the figure of comparative profit by both the methods,
Marginal Costing method and Absorption Costing Method.
Q.3: The data below relate to Venus Ltd. Which makes and sell computer
Particulars March April
Sales 5,000 Units 10,000 Units
Production 10,000 Units 5,000 Units
Sale Price per unit Rs. 100 Rs. 100
Variable cost per unit Rs. 50 Rs. 50
Fixed Production Overheads incurred Rs. 1,00,000 Rs. 1,00,000
Fixed Production overheads cost per unit being Rs. 10 Rs. 10
the predetermined overhead Absorption rate
Administration, Selling and Distribution Rs. 50,000 Rs. 50,000
Overheads (Fixed)
You are required to prepare comparative profit statement for each month using
(1) Absorption Costing (2) Marginal Costing
(7) Notes by Prof. M. B. Thakoor

8. Notes by Prof. M. B. Thakoor
Steps for Problems i.e. Q.1. Q.2. Q.3.
(I) Find the Units sold by the following formula
Quarter I Quarter II Quarter III Quarter IV
(Units) (Units) (Units) (Units)
Opening Stock XXX XXX XXX XXX
Add: Production XXX XXX XXX XXX
XXX XXX XXX XXX
Less: Closing Stock XXX XXX XXX XXX
Units Sold XXX XXX XXX XXX
(II) Under Absorption Costing:
Quarter I Quarter II Quarter III Quarter IV
(Units) (Units) (Units) (Units)
Sales (Units Sold X S.P.) XXX XXX XXX XXX
Less: 1. Variable Cost XXX XXX XXX XXX
(Units Sold x V.C. Per Unit)
2. Fixed Cost XXX XXX XXX XXX
(Units Sold x F.C. Per Unit)
Profit [Sale – (V.C. + F.C.)] XXX XXX XXX XXX
Add: Over absorption XXX XXX
(Actual Prodn. – Normal
Prodn.) X Overhead rate
XXX XXX XXX XXX
Less: Under Absorption XXX XXX
(Normal Prodn. – Actual
Prodn.) X Overhead rate
Final Profit XXX XXX XXX XXX
(III) Under Marginal Costing
Quarter I Quarter II Quarter III Quarter IV
(Units) (Units) (Units) (Units)
Sales (Units Sold X S.P.) XXX XXX XXX XXX
Less: Variable Cost XXX XXX XXX XXX
(Units Sold x V.C. Per Unit)
Contribution XXX XXX XXX XXX
Less: Fixed Cost XXX XXX XXX XXX
(For Normal Prodn. Or
Fixed Amount Given but
not the absorption rate)
Profit XXX XXX XXX XXX
(8) Notes by Prof. M. B. Thakoor

9. Notes by Prof. M. B. Thakoor
RECONCILIATION
Quarter I Quarter II Quarter III Quarter IV
(Units) (Units) (Units) (Units)
Profit XXX XXX XXX XXX
Under Absorption Costing XXX XXX XXX XXX
Under Marginal Costing XXX XXX XXX XXX
For Reconciliation
Take for Each year
(Closing Stock – Opening Stock) X Predetermined Overhead Rates
If Closing Stock > Opening Stock it will be positive and to that extent profit will be more
in ABSORPTION COSTING.
If (Closing Stock – Opening Stock) X Predetermined Overhead Rate
If Closing Stock < Opening Stock it will be negative and to that extent profit will be less
in Absorption Costing (or More in Marginal Costing)
(9) Notes by Prof. M. B. Thakoor

10. Notes by Prof. M. B. Thakoor
Marginal Costing
Q. 1 What is Marginal Cost?
Ans. Marginal Cost is the amount at any given volume of output by which the
aggregate cost change, if the output is increased or decreased by 1 unit.
Q. 2 What is Marginal Costing?
Ans. Marginal Costing is a technique of costing which ascertains the effect of change
in volume on the profits of the company, by dividing the cost into fixed and
variable.
Q. 3 What is Fixed Cost?
Ans. Fixed cost is a cost which remains fixed irrespective of the level of production.
Fixed cost remain fix in total but changes per unit.
Q. 4 What is Variable Cost?
Ans. Variable cost is a cost which varies as per the level of production variable cost
per unit always remain the same.
MARGINAL COST STATEMENT
Sales xxx
Less : Variable Cost xxx
----
Contribution xxx
Less : Fixed Cost xxx
-----
Profit xxx
===
Sales : Variable cost = Contribution
Contribution – Fixed Cost = Profit
∴Contribution = Fixed Cost + Profit
∴Contribution = Sales Price – Variable Cost
Or Contribution = Fixed Cost + Profit
(10) Notes by Prof. M. B. Thakoor

11. Notes by Prof. M. B. Thakoor
Q.5 What is Break Even Point?
Ans. Break Even Point is a point where the company or Business earns no profit or
incurs no loss. It is the point where the sale revenue = Total Cost or A point of
no profit no loss.
Fixed Cost
Break Even Point (in Units) = ----------------
Contribution per unit
Fixed Cost
Break Even Point (in Rupees) = --------------
P/V. Ratio
Q.6 What is Profit Volume Ratio or P/V. Ratio ?
Ans. This Ratio expresses the relationship between Contribution and Sales. It is
expressed as a % and indicates the relative profitability of different product.
C
P/V Ratio = ---- x 100
S
Sales – V. C.
OR ----- ---------- x 100
Sales
F.C. + Profit
OR = --------------- x 100
Sales
The higher the P/V. Ratio the more profitable is the product.
Q. 7 What is Margin of Safety (M/S) ?
Ans. Margin of Safety is the excess of Actual Sale over Break Even Sales
Margin Safety = Actual Sale – Break Even Sale
Larger the Marginal Sale more sound is the business.
(11) Notes by Prof. M. B. Thakoor