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Meaning of Marginal Cost
Marginal cost means an amount at any given volume of output by which the aggregate costs are changed if the volume of output is changed by one unit.
Hence, marginal cost is the differences of variable cost if the volume of output is either increased or decreased by one unit.
Meaning of Marginal costing
According to CIMA Terminology,
“marginal costing is 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.”
It is understood from the above terminology that only variable costs are charged to operations, processes or products and all other indirect costs are to be written off against profits in the period in which they arise.
What are the need for Marginal costing?
Fixed expenses remain constant in total and do not vary according to an increase or decrease in the level of production to some extent. But, in the case of variable expenses, it varies in direct proportion to increase or decrease in the level of production and remain constant per unit of output. Fixed expenses per unit continue to vary with the increase or decrease in production because these expenses remain constant up to a certain level of production. Hence, the fixed overhead cost per unit is different at different levels of production. On the basis of this background, one more special technique in cost accounting is developed i.e. marginal costing.
Marginal Costing technique
Marginal costing technique differentiate the variable cost from the fixed cost and only variable costs are charged to cost units. The excess of sales revenue over variable cost of production is termed contribution.
Under the marginal costing technique, the fixed overheads are entirely excluded from. the cost of production and provide a same cost per unit up to a certain level of production. The fixed (factory) manufacturing overheads are not considered as product costs. Hence, these are not included in the valuation of closing stock and cost of goods sold. The reason is that fixed manufacturing costs are treated as period cost under marginal costing technique. Period costs are the costs which are a function of a time rather than of any activity i.e. production.
Thus, fixed expenses are not included in the cost of a product but are charged against “fund”. The fund is created out of the excess of selling price over the total variable costs.
Marginal costing is not a method of costing like job or process costing. But, it is a technique of cost accounting system and used as a tool of decision-making. Being a technique, marginal costing is not used independently and can be used along with any method of costing ‘such as Job Costing, Process Costing and the like.
The marginal costing technique is used to analyses and interprets the cost data for the purpose of identifying the profitability of product, process, department or cost centre.