MARGINAL

COSTING
 Marginal Cost
• According to the Terminology of Cost Accountancy of the
Institute of Cost And Management Accountant, London,
Marginal Cost represents “the amount of any volume of
given output by which aggregate cost are changed if the
volume of output is increased by one units.

• In practice, it is measured by the total variable costs

attributable to one unit.

• For example, the cost of production of 1,000 units of

radios is Rs. 2, 00, 000 and that of 1001 units is Rs. 2,
00, 150 the marginal cost is Rs. 150, i.e., 2, 00, 150 – 2,
00, 000.
 Marginal Costing
• The Institute of Cost and Management, London, has
defined Marginal costing as “the ascertainment of
marginal costs and of the effects on profit of
changes in volume or type of output by
differentiating between fixed costs and variable
costs”. “In this technique of costing only variable
costs are charged to operational process or
products, leaving all indirect cost to be written off
against profit in the period in which they arise”.
 Marginal Costing
• Thus, marginal costing is not a system of
costing such as process costing, job costing,
operating costing, etc. but a technique
which is concerned with the changes in
costs and profits resulting from changes in
the volume of output. Marginal costing is
also known as variable costing.
 FEW CHARACTERISTICS OF
MARGINAL COSTING
Itmanagement
is a technique of analysis and presentation of cost which help
in making many managerial decision and is no an
independent system of costing such as job costing or process costing.
All elements of cost- production, administration and selling and
distribution are classified into variable and fixed components. Even
semi-variable costs are analysed into fixed and variable.
The variable cost (marginal costs) are regarded as the cost of the
products.
Fixed costs are treated as period costs and are charged to profit and
loss account for the period for which they are incurred.
The stocks of finished goods and work-in-process are valued at
marginal cost only.
Prices are determined on the basis of marginal cost by adding
‘contribution’ which is the excess of sales and selling price over
marginal cost of sales.
 Distinction between marginal and absorption costing
Marginal costing Absorption costing
1.
Only variable costs areBoth fixed and variable costs
considered for productare considered for product
costing and inventorycosting and inventory valuation.
valuation.
2.
Fixed costs are regarded asFixed costs are charged to the
period costs. The Profitabilitycost of production. Each product
of different products is judgedbears a reasonable share of
by their P/V ratio. fixed cost and thus the
profitability of a product is
influenced by the
apportionment of fixed costs.
3.
Cost data presented highlightCost data are presented in
the total contribution of eachconventional pattern. Net profit
product. of each product is determined
after subtracting fixed cost
along with their variable costs.

4.
The difference in theThe difference in the magnitude
magnitude of opening stockof opening stock and closing
 MARGINAL COST
EQUATION
FOR THE SAKE OF CONVINIENCE, A MARGAL COST
EQUATION CAN BE DERIVED AS FOLLOWS:-

Sales – Variable cost = contribution.

Or, Sales – Variable cost + contribution.
Or, Sales = Variable cost + Fixed cost ± Profit / Loss.
Or, Sales - Variable cost = Fixed cost ± Profit / Loss.
Or,

Where ‘S’ stands for Sales.

‘V’ stands for Variable cost.
‘F’ stands for Fixed cost.
‘P’ stands for Profit / Loss.
 Profit / Volume Ratio (P/V Ratio or
C/S Ratio)

Contribution
P/V Ratio = Sales

Cost-Volume-Profit Analysis

Cost-Volume-Profit analysis is a technique for studying

the relationship between cost volume and profit. Profits
of an undertaking depends upon a large number of
factors. But the most important of these factors are the
cost of manufacture, volume of sales and the selling
price of the products. In words of Herman C. Heiser,“the
most significant single factor in profit planning of the
average business is the relationship between volume of
business, cost and profits”. The CVP relationship is an
important tool used for profit planning of a business.
BREAK EVEN CHART
 FORMULA OF C-V-P
ANALYSIS
• Refer b&d 1063&1064
 Numerical 1
• A manufacturing company finds that while
the cost of making a component No. 0.51 in
its own workshop is Rs. 8.00 each, the same
is available in market at Rs. 6.50 with an
assurance of continious supply. Give your
suggestion whether to make or buy this
component. Give also your views in case
the supplier reduces the price from Rs. 6.50
to Rs. 5.50. The cost of data follows:-
 Materials 3. 00

Direct Labor 2. 00

Other Variable -1. 00

Expenses.
Depriciation And 2. 00
Other Fixed
Expenses.
Total . 8. 00
 NUMERICAL – 2
From the following information calculate the break-even
point in units and in sales value:

Output = 3, 000 units.

Selling Price per unit = Rs. 30.
Variable Cost per unit = Rs. 20.
Total Fixed Cost = Rs. 20, 000.
 NUMERICAL - 3
From the following particulars,
calculate:
i. Break-even point in terms of sales value and in units.
ii. Number of units that must be sold to earn a profit of
Rs. 90,000.
Fixed Factory Overhead cost = Rs. 60,000.
Fixed Selling Overhead cost = Rs. 12,000.
Variable Manufacturing Cost per Unit = Rs. 12.
Variable Selling Cost per unit = Rs. 3.
Selling Price per unit = Rs.
24.
 NUMERICAL - 4
From the following data, you are required to
calculate:
a. P/V ratio.
b. Break-even sales with the help of P/V ratio.
c. Sales required to earn a profit of Rs. 4, 50, 000.
Fixed Expenses = Rs. 90, 000.
Variable cost per unit:
Direct Material = Rs. 5.
Direct Labour = Rs. 2.
Direct Overhead = 100% of Direct
abour.
Selling Price per unit = Rs. 12.
 Differential cost
• It may be defined as “the increase or decrease in
total cost or the change in specific elements of
cost that result from any variation in operations”.
It represents an increase or decrease in total cost
resulting out of :
• (a) producing or distributing a few more or few
less of the products;
• (b) a change in the method of production or of
distribution;
• (c) an addition or deletion of a product or a
territory; and
• (d) selection of an additional sales channel.
 Incremental cost
• It is defined as, “the additional costs of a
change in the level or nature of activity”. As
such for all practical purposes there is no
difference between incremental cost and
differential cost. However, from a
conceptual point of view, differential cost
refers to both incremental as well as
decremental cost. Incremental cost and
differential cost calculated from the same
data will be the same.
THANK YOU