Marginal costing, as one of the tools of management accounting helps management in making certain decisions. It provides management with information regarding the behavior of costs and the incidence of such costs on the profitability of an undertaking. Marginal costing is defined as “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs”. Marginal costing is not a separate costing. It is only a technique used by accountants to aid management decision. It is also called as “Direct Costing” in U.S.A. This technique of costing is also known as “Variable Costing”, “Differential Costing” or “Out-of-pocket” costing.
Marginal cost is the cost of one unit of product or service which would be avoided if that unit were not produced or provided.
- Costs are separated into the fixed and variable elements and semi-variable costs are also differentiated likewise.
- Only the variable costs are taken into account for computing the value of stocks of work-in-progress and finished products.
- Fixed costs are charged off to revenue wholly during the period in which they are incurred and are not taken into account for valuing product cost/inventories.
- Prices may be based on marginal costs and contribution but in normal circumstances prices would cover costs in total.
- It combines the techniques of cost recording and cost reporting.
- Profitability of departments or products is determined in terms of marginal contribution.
- The unit cost of a product means the average variable cost of manufacturing the product.
