Introduction: Fixed expenses remains constant in an aggregate amount and do not vary at certain level of production. But variable cost increases or decreases to proportion to increase or decrease in output. Marginal costing is a costing method in which only variable costs are accumulated and cost per unit is ascertained only on the basis of variable costs. Marginal Costing method is used particularly for short-term decision-making.The short term objective is to maximize contribution per unit. If the existing resources is limited, then Marginal Cost analysis can be employed to maximize contribution per unit of the constrained resource.
Contribution : Contribution is the difference between the sales and the marginal cost of sales. It contributes towards fixed expenses and profit. Marginal costing assumes that the contribution provides a pool out of which fixed costs is met ; any surplus being the profit or net margin.
Marginal cost of sale means variable cost and selling and distribution cost and exclude fixed cost of an organization.
Definition of Marginal Costing:
Marginal Costing is defined as “ the accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution. Its special value is in decision - making.
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