Marginal Costing

Marginal Costing

Marginal costing is a technique of cost ascertainment according to variability of the expenses and can be used in any method of costing for basically managerial decision-making. Therefore before using the technique of marginal costing all the expenses has to be classified into Fixed and Variable Expenses. As we know that some of the expenses are of Semi-Variable nature. Therefore before applying marginal costing techniques, we have to segregate Variable cost and Fixed cost from the semi-variable expenses by applying some suitable method. Generally all the direct cost like material, labour, direct expenses and direct overheads related to manufacturing, administration and selling & distribution are considered as Variable Cost and all indirect expenses form fixed cost. Marginal cost is also known as variable cost.

Cost-Volume-Profit (CVP) Analysis

According to Marginal Costing, variable costs are charged to products and contribution is calculated as a difference of sales minus variable cost. Fixed costs are not charged to products as these costs are related to period or time. Fixed costs are recovered from the contribution to work out net profit at the end of period. In absorption or total cost system we use following equation to work out Profit: -

Profit = Sales – Costs (here Costs means total cost of production)

In Marginal Costing Profit is calculated in two stages: -

I Stage Contribution = Sales – Variable cost

II Stage Profit = Contribution – Fixed Cost

If we combine this two equation we get

Sales – Variable cost = Profit + Fixed cost

This may be written as also: -

Profit = Sales- Variable cost + Fixed Cost or Profit = Sales – Total Cost since Total cost = Fixed Cost + Variable cost.

From this analysis we observe that we are not changing the basic concept of our profit calculation that is profit is difference of Sales minus Cost. Only we are adding a concept of Contribution and first we are calculating contribution...