Marginal Costing

Meaning

The marginal costing is a technique of an accounting which may be defined as, “the ascertainment of cost by differentiating between fixed cost and variable cost of marginal cost and of the effect on profits of changes in the volume of the type of output”.  Under marginal costing variable cost is charged as the cost of production and valuation of stock of work-in-progress or finished goods is done on the basis of variable cost. The following are the elements of marginal costing are such

The following are the elements of marginal costing are such

  •  All elements of costs are classified into fixed and variable cost.
  • profits are calculated by deducting the fixed cost from the contribution.
  • This technique is used for cost control and decision-making.
  •  Profitability of various levels of activity is determined by cost- volume- profit analysis.

The difference between marginal costing and absorption costing

Marginal costing Absorption costing
Under this method, only variable costs are charged to production.Under this method, both costs fixed as well as variable costs are recovered from production.
The valuation of inventory (including work-in-progress and finished stock) is done on the basis of total variable cost only.The valuation of inventory (including working in progress and finished stock) done on the basis of fixed cost as well as variable cost.
Marginal costing is used for short term decision.Absorption costing is used for long term decisions.
Marginal costing focuses its attention on selling and pricing aspects.Absorption costing focuses its attention on production, operation or process.

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