Marginal Costing

R.J. Yuvnesh Kumar

Assistant Professor,

Annai Violet Arts & Science College

finition :-
l Costing is defined as the amount at any given volume of output by which aggregate costs c

hanged if the volume of output is increased or decreased by one unit.

aning :-
al Costing is the technique of controlling by bringing out the relationship betwe
fit & volume.
Definition & Meaning
cept of Marginal Costing is also known as variable costing because it is based

avior of costs that vary with the volume of output

Marginal Costing classifies costs into 2 :-

ixed Cost
Introduction

ariable Cost
xed Cost :-
penditure remains same irrespective of output. This includes costs which a firm has to i
espective of units of production

Eg :- Building rent

ariable Cost :-
name suggests variable cost varies directly with output. It is directly proportional to vo
oduction

Eg :- Cost of raw materials

Fixed and Variable Cost
xed cost & Variable cost

nly variable Costs are considered to calculate the cost per unit of a product

ost Controlling
Features

ows the difference between sales and variable

nown as Contribution
xed costs are excluded in marginal costing as they are expenses belonging to
/c

seful technique for Export firms

Features

lling price is determined on the basis of marginal costs

stant nature of marginal cost

ng decisions

rmination of profits

g responsibility
Advantages

control

reporting

s determine breakeven point

ision making
fficult to separate Fixed & Variable costs

ver-emphasis
er-emphasis on sales

ed costs ignored

t suitable for long run & to huge industries

cks efficiency in Cost control

Limitations

t applicable to contract costing

nores Fixed costs in valuation of stock of WIP & finished goods

t recognized by Income tax authorities

 Contribution is the profit before adjusting fixed cost

 It is an assumption that excess of sales over variable cost contributes to a fund n

fixed cost but also provides some profit

 If, Contribution = Fixed cost, company achieves breakeven

 This concepts helps in taking Decisions like :-

 Whether to produce or discontinue

 Fixing up selling price of bulk orders
Concept of Contribution
PARTICULARS AMT (Rs.) COST PER UNIT

SALES 1000 10

- VARIABLE COST - 400 4

CONTRIBUTION 600 6

- FIXED COST 300 3

PROFIT 300 3
It is popularly known as P/V Ratio

It expresses relationship between Contribution & Sales

 It is that stage where firm is making NO PROFIT, NO LOSS

 Total sales revenue = Total costs incurred

It is the actual sales over & above the breakeven sales

Thus it is the difference between actual & breakeven sales