- Marginal costing is a technique that differentiates between fixed and variable costs to help with managerial decision making. It involves calculating marginal costs and the effect on profit from changes in output volume or product mix. - The key aspects of marginal costing are classifying total costs into fixed and variable components, using marginal costs and contribution margins to evaluate decisions, and treating fixed costs as period costs rather than product costs. - Marginal costing provides several advantages like simplifying cost analysis, aiding cost control, profit planning, performance evaluation, and decision making around pricing, production, and product mix. It helps management evaluate alternatives and maximize returns.

1. Presented by
Prof. Manisha S. Dabhade

2. LEARNING OBJECTIVES
– To understand the concept of marginal costing
– To learn the features, advantages and disadvantages
of
marginal costing
– To calculate marginal cost, contribution, PE Ratio,
etc.

3. Introduction – Marginal
Costing:
– At any given level of output, additional output can
normally
be obtained at less than proportionate cost per unit.
– This is because the aggregate of certain items of cost will
tend to remain fixed and only the aggregate of the
remainder (variable Cost) will tend to rise proportionately
with increase in output.
– Conversely, a decrease in the volume of output will
normally be accompanied by a less than proportionate fall
in the aggregate cost.

4. Introduction – Marginal
Costing:
– Therefore, costs should be analysed into variable and
fixed components, for meaningful decision-taking.
This theory, which recognizes the difference between
variable and fixed costs, is called Marginal Costing.

5. Meaning and Definition of
Marginal Costing
– Marginal costing is defined by I.C.M.A. as “the
ascertainment of marginal costs and of the effect on
profit of changes in volume or type of output by
differentiating between fixed costs and variable costs.

6. Meaning and Definition of
Marginal Costing
– Thus, Marginal costing is defined as the ascertainment of
marginal cost and of the ‘effect on profit of changes in
volume or type of output by differentiating between fixed
costs and variable costs.
– Marginal costing is mainly concerned with providing
information to management to assist in decision making
and to exercise control.
– Marginal costing is also known as ‘variable costing’ or
‘out
of pocket costing’.

7. Meaning and Definition of
Marginal Costing
– The technique of marginal costing is based on the
distinction between product costs and period costs.
– Only the variable costs are regarded as the costs of
the products while the fixed costs are treated as
period costs which will be incurred during the period
regardless of the volume of output.

8. Meaning and Definition of
Marginal Costing
– It is technique of decision making, which involves:
– (a) Ascertainment of total costs
– (b) Classification of costs into - (1) Fixed and (2)
Variable
– (c) Use of such information for analysis and decision
making.

9. Assumptions of Marginal
Costing:
– The technique of marginal costing is based upon the following
assumptions:
– a. All elements of cost—production, administration and selling and
distribution—can be segregated into fixed and variable components.
– b. Variable cost remains constant per unit of output irrespective of
the level of output and thus fluctuates directly in proportion to
changes in the volume of output.
– c. The selling price per unit remains unchanged or constant at all
levels of activity.

10. Assumptions of Marginal
Costing:
– d. Fixed costs remain unchanged or constant for the
entire volume of production.
– e. The volume of production or output is the only
factor
which influences the costs.

11. Features / Characteristics of
Marginal Costing
– 1. Cost Classification: The marginal costing technique
makes a
sharp distinction between variable costs and fixed costs. It
is
the variable cost on the basis of which production and sales
policies are designed by a firm.
– 2. Managerial Decisions: It is a technique of analysis and
presentation of costs which help management in taking
many
managerial decisions such as make or buy decision, selling
price
decisions etc.

12. Features / Characteristics of
Marginal Costing
– 3. Inventory Valuation: Under marginal costing,
inventory for
profit measurement is valued at marginal cost only.
– 4. Price Determination: Prices are determined on the
basis of
marginal cost by adding contribution which is the
excess of
selling price over variable costs of sales.

13. Features / Characteristics of
Marginal Costing
– 5. Contribution: Marginal costing technique makes
use of
Contribution for taking various decisions.
Contribution is the
difference between sales and marginal cost. It forms
the basis
for judging the profitability of different products or
departments.

14. Advantages of Marginal
Costing:
– 1. Simple and Easy: It is very simple to understand and
easy to
operate.
– 2. Helpful in Cost Control: Marginal costing divides total
cost into
fixed and variable cost. Marginal costing by concentrating
all
efforts on the variable costs can control total cost.
– 3. Profit Planning: It helps in short-term profit planning
by
making a study of relationship between cost, volume and
Profits, both in terms of quantity and graphs.

15. Advantages of Marginal
Costing:
– 4. Evaluation of Performance: The different products and
divisions have different profit earning potentialities. Marginal
cost analysis is very useful for evaluating the performance of
each sector.
– 5. Helpful in Decision Making: It is a technique of analysis and
presentation of costs which help management in taking many
managerial decisions such as make or buy decision, selling price
decisions, Key or limiting factor, Selection of suitable Product
mix etc.

16. Advantages of Marginal
Costing:
– 6. Production Planning: It helps the management in
Production
planning. The effect of alternative production policy can be
readily available and decision can be taken that would yield
the
maximum return to Business.
– 7. It removes the complexities of under-absorption of
overheads.
– 8. The distinction between product cost and period cost
helps
easy understanding of marginal cost statements.

17. Advantages of Marginal
Costing:
– 9. It is a valuable aid to management for decision-marking and
fixation of selling prices, selection of a profitable product/sales
mix,
make or buy decision, problem of key or limiting factor,
determination
of the optimum level of activity, close or shut down decisions,
evaluation of performance and capital investment decisions, etc.
– 10.It facilitates the study of relative profitability of different
product
lines, departments, production facilities, sales divisions, etc.
– 11. It is complimentary to standard costing and budgetary
control and
can be used along with them to yield better results.

18. Thank You!