1. MARGINAL COSTING
…

2. TOTAL COST
• COST CAN BE CLASSIFIED IN TO FIXED AND VARIABLE
• The cost which vary directly in relation to
the volume of output is called variable
cost
• The cost which remain constant or
unaffected by the change in volume
of production is called fixed cost.
• it is always uncontrollable so it does not
consider management for decision
making. Or it is not relevant

3. meaning
• It is the additional cost of producing an
additional unit. It is the cost of the last unit
produced.
• Definition
• ICMA LONDON defines MC as the
amount at any given volume of
output by which aggregate costs are
changed if the volume of output is
increased or decreased by one unit
• It is the total cost changes when
there is a change in output by one
unit.

4. ..
• Eg. if the total cost of producing 100 unit is Rs.
10,000 and cost for 101 is Rs. 10,050, so the MC
of producing an additional unit will be Rs. 50
• So Mc is the cost of one more or one less unit produced than the
existing level of production.
• Mc is also called as variable cost. Because an
increase in 1 unit of production will increase in
variable cost only.
• Mc= Direct Material cost+ Direct Labour cost+ Direct Expenses +
Variable overheads.
• Or mc= Prime cost plus variable
overheads

5. Marginal costing
• It is a technique of ascertaining cost whereby
marginal costs are ascertained.
• Here only variable costs are charged to cost unit
• Fixed cost are charged to a fund called
contribution.
• Marginal costing is the ascertianment by
differentiating between fixed costs and variable
costs, of marginal cost and of the effect on profit
of changes in volume or type of output.

6. Features of Marginal costing
• it is not a method of costing. It is only a
technique for managerial decision making
• All costs are classified in to fixed and variable
• Fixed cost charged against profit
• Variable cost only charged to product
• The stock of finished products and work in
progress are valued at marginal cost
• Selling price equal to variable cost +
contribution

7. Absorption costing
• Here both costs are taken. it is also known as full cost or total
cost techniques. It is a conventional technique.
• Definition
It is a technique whereby fixed as well
as variable costs are allotted to cost
units. ICMA London

8. Limitation of absorption costing
• A portion of FC is carried over to
subsequent accounting period as part of
closing stock. So not as per accounting
period concept
• It depends on levels of output which may vary
from period to period. Due to existence of fixed
cost, cost per unit may change.
• Not suitable for managerial decision
making(i.e. Buy or make decision, product
mix, selection of best alternatives )
• Does not help in preparing flexible budget,
tender, quotation etc
• Not suit for planning or controlling cost.

9. ABSORPTION COSTING VS MARGINAL COSTING
BASIS ABSORPTION COSTING MARGINAL COSTING
1. CHARGING OF
COST
ALL COSTS ARE CHARGED ONLY VARIABLE COST
2. STOCK VALUATION TOTAL COST MARGINAL COST
3. BASIS OF DECISION PROFIT CONTRIBUTION
4. SUITABILITY EXTERNAL REPORTING INTERNAL REPORTING
5. EFFECT OF COST PER
PRODUCTION INCREASE
UNIT
COST PER UNIT REDUCES
COST PER UNIT REMAIN
SAME AT ALL LEVELS OF
PRODUCTION
6. PURPOSE LONG TERM PRICE POLICY
AND COST
PLANNING, CONTROLLING
AND DECISION MAKING IN
SHORT RUN
7. EMPHASIS PRODUCTION SELLING AND PRICING
ASPECTS

10. DIRECT COSTING TECHNIQUES
• HERE ONLY DIRECT COST ARE TAKEN TO
CALCULATE THE COST OF PRODUCT. THAT IS
WHETHER FIXED OR VARIABLE ARE TAKEN
HERE
• WHILE IN MARGINAL COSTING ONLY
VARIABLE COSTS ARE CHARGED TO
PRODUCT.FIXED COSTS ARE COMPLETELY
IGNORED.

11. ASSUMPTIONS OF MARGINAL
COSTING
• 1. all cost are divided in to fixed and variable
• 2. fixed cost remain constant at all levels of
activity
• 3. variable cost vary but unit cost will not vary
• 4. selling price remains same
• 5.Price of material, rates of labour etc constant
• 6.Volume of production only influence costs
• 7.There is no stock

12. Dis advantages of marginal costing
• 1. Difficulty in separation – cost
• 2. Difficulty in application- fixed assets oriented
business
• 3. Under valuation of stock- no fixed cost
element
• 4. True only in short period
• 5. Time factor is completely ignored- two jobs
• 6.More emphasis on sales- production equally
important
• 7. Wrong basis for pricing- not contribution
alone