Marginal Costing | Sahithyan's Notes

A costing technique where only variable or direct cost is charged to the cost unit produced.

Fixed costs are never charged to production, treated as a period charge, and written off to the comprehensive income statement in the period incurred.
Fixed manufacturing overhead costs are not allocated to, not absorbed by, the products manufactured.
Useful for management decision-making.

Marginal Cost

The additional cost needed to produce one more unit of a good or service.

\begin{aligned} \text{Marginal Cost per Unit} &= \text{Direct Material Cost per Unit} \\ &+ \text{Direct Labour Cost per Unit} \\ &+ \text{Other Variable Cost per Unit} \end{aligned}

Marginal cost per unit differs from absorption cost per unit only by the fixed manufacturing overhead absorbed per unit.

Product Cost vs Period Cost

Classifies costs by whether they are inventoried until sale (product cost) or expensed in the period incurred (period cost), the basis for marginal costing writing off fixed manufacturing overhead as a period cost.

Product Cost

Direct materials, direct labor, variable manufacturing overhead.

Period Cost

Fixed manufacturing overhead, variable non-manufacturing overhead expenses, fixed non-manufacturing overhead expenses.

Worked Example

A company produces 1 product with the following data for a period:

Item	Value
Selling price per unit	$50
Direct material cost per unit	$12
Direct labour cost per unit	$8
Variable overhead cost per unit	$5
Fixed manufacturing overhead	$60000
Units produced	10000
Units sold	9000

\begin{array}{llll} \text{Marginal Cost per Unit} & = & 12 + 8 + 5 & = 25 \\ \text{Contribution per Unit} & = & 50 - 25 & = 25 \\ \text{Total Contribution} & = & 9000 \times 25 & = 225000 \\ \text{Profit} & = & 225000 - 60000 & = 165000 \end{array}

Item	Amount
Sales ( $9000 \times 50$ )	$450000
Marginal cost of sales ( $9000 \times 25$ )	($225000)
Contribution	$225000
Fixed manufacturing overhead	($60000)
Profit	$165000