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Marginal Costing

Updated on March 11, 2009

Introduction: Marginal Costing is a technique which also divides costs into two categories, but of somewhat different nature. In this case costs are identified as being either fixed or variable, relative to the quantity of output:

Total Cost    =    Variable Costs   +   Fixed Costs

 Marginal Costing – Definition:

Marginal costing distinguishes between fixed and variable costs as conventionally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads. Marginal costing is formally defined as:

       “ The accounting system in which variable cots are charged to cost units and fixed costs of period are written off in full against the aggregate contribution. Its special value is in recognizing cost behaviour and hence assisting in decision-making. “

The term contribution mentioned in the definition is the term given to the difference between Sales and Marginal Cost. Thus

Marginal Cost   =   Variable Cost    =    Direct Labour

                                                                                       +

                                                                          Direct Material

                                                                                       +

                                                                         Direct Expenses

                                                                                       +

                                                                      Variable Overheads

Contribution    =    Sales   -    Marginal Cost

The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context.

Ø      Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing;

Ø      In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred;

Ø      Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs.

Ø      The marginal cost statement is the basic document/format to capture the marginal costs.

Note:

Alternative names for marginal costing are the contribution approach and direct costing.

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      neha 3 years ago

      type of marginalcosting

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      Tytylayor 3 years ago

      Tz simplifed so it help understand the basis

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      manish 3 years ago

      nature of marginal costing

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      fellylagat 4 years ago

      this uderstood to be a student

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      dorothy 4 years ago

      just what i wanted. thanx

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      tawanda 4 years ago

      good but difficult to understand for beginners

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      shiba 4 years ago

      thankzzzz....

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      bhumi bakshi 4 years ago

      i think very good information for me nd understand me very wll.

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      Kelvin K Juma 4 years ago from Nairobi, Kenya

      Yeah, very helpful information, i did commerce and accounting back in my high school and i now understand what marginal cost is. thank you.

    • thescientist2012 profile image

      Kelvin K Juma 4 years ago from Nairobi, Kenya

      Yeah, very helpful information, i did commerce and accounting back in my high school and i now understand what marginal cost is. thank you.

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      ali raza 5 years ago

      nice information

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      usman virk 5 years ago

      amazing

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      BIMAL BHUSA JENA 5 years ago

      VERY NICE FOR ME

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      nidatun nisa 5 years ago

      hmmm nt dt mch...i was xpctin smthn elz!

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      moneymbe 5 years ago

      dis z e best

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      abel Dpaa 5 years ago

      its uesfuly to us tnk

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      mama@gac 5 years ago

      interesting

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      Akram_icmab 5 years ago

      Excellent presentation

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      burhanuddin 5 years ago

      its cooolll mahn, straight to d point

    • profile image

      burhanuddin 5 years ago

      its cooolll mahn, straight to d point

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      sachin 5 years ago

      Thanx!!!!!!

    • profile image

      parthi j 5 years ago

      super...very eary to understand

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      kjiwa tvwat 5 years ago

      Supa Nice init

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      stella 5 years ago

      very nice, thanks

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      narendra rawat icwa 6 years ago

      nice

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      Kiran rawat 6 years ago

      Thanx, it is nice.

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      Hassnain 7 years ago

      very nice knowledge

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      ankur khanna 7 years ago

      i can't understand this.pls help

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      punam 8 years ago

      i think dis one is good to understand..