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Understanding Marginal Costing Principles

Marginal costing is a technique that classifies costs into fixed and variable costs. It considers only variable costs in calculating the cost per unit of a product. This allows companies to determine the contribution of each unit sold. Contribution is the excess of sales over variable costs and represents the funds available to cover fixed costs and provide a profit. Marginal costing helps companies with decision making, cost control, pricing, and break-even analysis. Some limitations include the difficulty separating fixed and variable costs accurately and that it does not account for fixed costs in inventory valuation.

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Shri Vidhya
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54 views15 pages

Understanding Marginal Costing Principles

Marginal costing is a technique that classifies costs into fixed and variable costs. It considers only variable costs in calculating the cost per unit of a product. This allows companies to determine the contribution of each unit sold. Contribution is the excess of sales over variable costs and represents the funds available to cover fixed costs and provide a profit. Marginal costing helps companies with decision making, cost control, pricing, and break-even analysis. Some limitations include the difficulty separating fixed and variable costs accurately and that it does not account for fixed costs in inventory valuation.

Uploaded by

Shri Vidhya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

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

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