Marginal Costing

What is Marginal Costing?

Marginal Costing is an accounting approach used to determine the effect of variable costs on the total cost of production and profitability. It considers only the variable costs involved when making production-related decisions and ignores fixed costs, treating them as period costs. This approach is particularly useful in decision-making processes such as setting selling prices, choosing production levels, and evaluating the profitability of products.

Short Description: A cost accounting technique used to evaluate the impact of variable costs on the overall production cost and profit.

• Variable Costs: Costs that fluctuate with the level of production, such as materials and direct labor.
• Fixed Costs: Costs that remain constant regardless of the production level, such as rent and salaries.
• Contribution Margin: The difference between sales revenue and variable costs, indicating how much is contributing to fixed costs and profits.
• Profit Maximization: By focusing on variable costs, businesses can decide on the cost-effectiveness of producing more units.

Marginal Costing is useful in managing production costs and helps managers make informed financial decisions without the distortion of fixed costs.