1. Notes by Prof. M. B. Thakoor
MARGINAL COSTING
SYNOPSIS
(1) INTRODUCTION OF IMPORTANT TERMS
1) Marginal Cost 3) Fixed Cost
2) Marginal Costing 4) Variable Cost
5) Semi Variable / Semi Fixed Cost
(2) TECHNIQUES OF COSTING
1) Absorption Costing 2) Marginal Costing
(3) CONCEPT OF BREAK EVEN POINT
(4) CONCEPT OF PROFIT VOLUME RATIO
(5) PRACTICAL APPLICATIONS OF MARGINAL
COSTING TECHNIQUES
1) Pricing of Product
2) Make or buy decision
3) Operate or shutdown
4) Decision of Product Mix
5) Key or Limited Factor
a) Labour Shortage
b) Material Shortage
c) Machine Capacity constraint
(Capacity Utilisation)
(6) PROFIT PLANNING
(7) EXPANSION AND DIVERSIFICATION
(8) ACCEPT REJECT SPECIAL OFFER AND
SUBCONTRACTING.
(1) Notes by Prof. M. B. Thakoor

2. Notes by Prof. M. B. Thakoor
Marginal Costing also known as Direct Costing or
Variable Costing. The word Marginal Costing is common in
the U.K. and other Countries of the Continent, while the
expression “Direct Costing” or “Variable Costing” is
preferred in the U.S.A.
“Marginal Cost” is derived from the word “Margin” and
is well known concept of Economic theory. Thus quite in the
Economic Connotation of the term, it is described in simple
words as “the cost which arises from the production of
additional increment of output and it does not arise in case
the additional increments are not produced.”
"The amount at given volume of output by which
aggregate cost are changed if the volume of output is
increased or decreased by one unit.”
Marginal Costing is the ascertainment of Marginal Cost
by differentiating the cost between fixed cost and variable
cost and finding its effect on the profit of changes in volume
or type of output.
Marginal Costing necessitates Analysis of cost into
fixed and variable. Even semi variable costs have to be
closely and critically analysed into Fixed and variable.
(2) Notes by Prof. M. B. Thakoor

3. Notes by Prof. M. B. Thakoor
INTRODUCTION:
“Marginal Cost” is derived from the word “Margin” and is well
known concept of Economic theory. Thus quite in tune with the
Economic connotation of the term, it is described in simple words
as “Cost which arises from the production of additional increment
of output and it does not arrive in case the additional increments
are not produced.”
Q.1 What is Marginal Cost?
A. Marginal Cost is the amount at any given volume of output
by which the aggregate cost change, if the output is
increased as decreased by 1 unit.
Q.2 What is Marginal Costing?
A. Marginal Costing is a technique of costing which ascertains
the effect of change in volume on the profits of the company,
by dividing the cost into fixed and variable.
Q.3 What is Fixed Cost?
A. Fixed Cost is a cost which remains fixed irrespective of the
level of production. Fixed Cost remain fix in total but
changes per unit.
(3) Notes by Prof. M. B. Thakoor

4. Notes by Prof. M. B. Thakoor
Q.4 What is Variable Cost?
A. Variable Cost is a cost which varies as per the level of
production. Variable Cost remain fixed per unit but it
varies in total.
Q.5 What is Semi-Fixed / Semi-Variable Cost?
A. Semi-Fixed / Semi-Variable Cost are basically fixed cost upto
a certain level of activity specified and they vary after certain
level.
Ex. Maintenance expenditure to a certain level is fixed if
production do not fluctuate widely. And if production rises
beyond a fixed limit additional maintenance expenditure is
required though such additional expense may not vary
directly with production. Eg. Telephone Expenses.
Q.6 What is the basic theme of Marginal Costing ?
A. The concept of Marginal Costing is based on the important
distinction between product cost which is related to volume
of production and period cost which is related to period of
time and not volume of production.
This it is based on making a distinction of cost into
variable and fixed.
(4) Notes by Prof. M. B. Thakoor

5. Notes by Prof. M. B. Thakoor
TECHNIQUES OF COSTING
ABSORPTION COSTING MARGINAL COSTING
1. FORMAT OF STATEMENT
Cost Statement / Cost Sheet Marginal Cost Statement
for the year ended
Raw Material Cost xxx Sales Revenue xxx
Add: Direct Labour Less: Variable Cost
of Goods Sold
Add: Direct Expenses xxx 1. Direct Mat. xxx
PRIME COST xxx 2. Direct labour xxx
Add: Works Overhead xxx 3.Direct Expenses xxx
GROSS WORKS COST xxx 4. Variable Fy. OH
(if any) xxx
Add: Opening W.I.P. xxx 5. Variable Admn.
OH (if any) xxx
xxx 6.Variable S/D. OH xxx
xxx
Less: Closing W.I.P. xxx CONTRIBUTION xxx
xxx Less: Fixed Cost
Less: Sale of Scrap xxx 1. Factory OH. xxx
NET WORKS COST xxx 2.Office & Admn. xxx
Add: Office & Admn. 3. Selling & Dis.OH xxx
xxx
a) Fixed expenses xxx PROFIT xxx
b) Variable expenses xxx xxx
COST OF PRODUCTION xxx
Add: Op. Stock of F.G. xxx
xxx
Less: Closing Stock of F.G. xxx
COST OF GOODS SOLD xxx
Add: Selling & Distn.
a) Fixed Exp. xxx
b) Variable Exp. xxx xxx
COST OF SALE xxx
Add : PROFIT xxx
(5) Notes by Prof. M. B. Thakoor

6. Notes by Prof. M. B. Thakoor
Sale xxx
2. DATA PRESENTATION
Data is presented in the form of Data is presented in the form
Vertical Statement. One of them of vertical statement known
being Cost Sheet where Net as Marginal Cost Statement
Profit of each product is where the cost data presented
determined after subtracting highlights the contribution of
Fixed Cost along with the each product and the fixed
Variable Cost. cost is deducted from the total
contribution to get profit.
The Simple principle used =
Cost + Profit = Selling price The Simple principal used =
Sales – Cost = Profit.
3. TYPE OF COST
Both Fixed and Variable Cost are Only Variable Costs are
considered to find the cost of the considered for finding the
product. Marginal Cost.
4. INVENTORY VALUATION
Under Absorption Costing Under Marginal Costing
Inventory is valued at Factory inventory is valued at
Cost which include factory Variable Cost and no part of
overheads both Fixed and Fixed Cost is applied to the
Variable. A part of production inventory.
overhead is therefore carried to
the next accounting period along
with W.I.P. and finished goods.
5.IMPACT OF INVENTORY VALUATION ON PROFIT
a) No opening and no closing stock i.e. Production = Sale
Profit is same as Marginal Profit is same as absorption
Costing. Costing
b) When Closing Stock is more than Opening Stock.
Profit will be more than Marginal Profit will be less than
Costing Absorption Costing.
Logic: Because Under Absorption Costing a portion of fixed cost
is charged to the closing stock and the same is deducted from cost
so cost decreases hence profit increases.
(6) Notes by Prof. M. B. Thakoor

7. Notes by Prof. M. B. Thakoor
c) When Closing Stock is less than Opening Stock.
Profit will be less than Marginal Profit will be more than
Costing Absorption Costing.
Logic: Under Absorption Costing a portion of fixed cost is
charged to opening stock which is added to cost and its impact is
greater than closing stock. So cost increases and profit decreases
of the Business organizations.
6. AID IN DECISION MAKING
As both Fixed are variable cost As it classify cost as per
are considered and it do not variability it do help in decision
recognize the difference making considering the
between Fixed Cost and Relevance of certain cost and
Variable Cost it do elaborately irrelevance of certain cost.
explain past profit / losses but
do not help when it comes to
tomorrows result. It considers
all cost are Releyant Cost.
Process of Marginal Costing
First find the difference between sale and variable cost i.e. Excess
of sale over variable cost and this difference is known as
contribution. The excess of contribution over Fixed Cost if profit.
The emphasis is on increasing the total contribution.
Sales – Variable Cost = Contribution
Contribution – Fixed Cost = Profit
(7) Notes by Prof. M. B. Thakoor

8. Notes by Prof. M. B. Thakoor
RECONCILIATION OF RESULTS OF ABSORPTION
COSTING AND MARGINAL COSTING
When results of Absorption Costing and Marginal Costing are
compared it is necessary to make adjustments for under absorbed
overhead and / or over Absorbed overheads.
Because under absorption costing fixed overhead rate is
predetermined based on normal level of activity.
When actual activity level is different from normal activity level, a
situation of under absorption or over absorption of fixed cost
arises.
(1) Under Absorbed = Normal Prod. – Actual Prod X Fixed Overhead
Fixed Overhead Level Level rate per unit
The above amount is reduced from profit under Absorption
Costing or the above amount is added to the cost under Absorption
Costing before comparing profit with Marginal Costing.
(2) Over Absorbed = Actual Prod. – Normal Prod X Fixed Overhead
Fixed Overhead Level Level rate per unit
The above amount is added to profit under Absorption Costing or
the above amount is deducted from the cost of production under
absorption costing before comparing profit with Marginal Costing.
(8) Notes by Prof. M. B. Thakoor

9. Notes by Prof. M. B. Thakoor
Problems:
Q.1: Following cost data is given for a production of N & Co. Ltd.
Particulars Per Unit (Rs.)
Sale Price 10
Variable Cost 6
Fixed Cost 2
Normal Production 26,000 units
Following additional data are given for the four consecutive periods.
Particulars Period I Period II Period III Period IV
(Units) (Units) (Units) (Units)
Opening Stock - - 6,000 2,000
Production 26,000 30,000 24,000 30,000
Sales 26,000 24,000 28,000 32,000
Closing Stock 6,000 2,000 -
Prepare a statement showing the profit for different period under both Marginal Costing
Method and Absorption Costing Method.
Q.2: Sale Price Rs. 5.00 per unit
Variable Cost Rs. 3.00 per unit
Fixed Cost Rs. 1.00 per unit
Normal Production 15,000 units
Total Fixed Cost for the year Rs. 15,000
Following statement shows the position of opening and closing stock.
Particulars Period I (Units) Period II (Units)
Opening Stock - 3,000
Production 17,000 14,000
Sale 14,000 16,000
Closing Stock 3,000 1,000
Prepare statement showing the figure of comparative profit by both the methods,
Marginal Costing method and Absorption Costing Method.
(9) Notes by Prof. M. B. Thakoor

10. Notes by Prof. M. B. Thakoor
Q.3: The data below relate to Venus Ltd. Which makes and sell computer
Particulars March April
Sales 5,000 Units 10,000 Units
Production 10,000 Units 5,000 Units
Sale Price per unit Rs. 100 Rs. 100
Variable cost per unit Rs. 50 Rs. 50
Fixed Production Overheads incurred Rs. 1,00,000 Rs. 1,00,000
Fixed Production overheads cost per unit Rs. 10 Rs. 10
being the predetermined overhead
Absorption rate
Administration, Selling and Distribution Rs. 50,000 Rs. 50,000
Overheads (Fixed)
You are required to prepare comparative profit statement for each month using
(1) Absorption Costing
(2) Marginal Costing
(10) Notes by Prof. M. B. Thakoor