1. MARGINAL COST OR VARIABLE COST OR DIRECT COST
Marginal cost is the variable cost of one more unit of a product or service. As such, it arises from additional increments of output. Marginal costing considers only variable cost ( those costs of production that vary with output) in calculating the cost of the product while fixed costs are charged against the revenue (sales) of the product.
Thus, Marginal cost or variable cost = Prime cost (Direct Materials + Direct Labour Direct expenses )+ Total Variable Overheads Or
Marginal Cost or variable cost = Total cost - Fixed Cost

2. MARGINAL COST OR VARIABLE COST OR DIRECT COST
Thus, here variable costs are treated as product cost and fixed costs are not treated as product cost. Fixed manufacturing cost are part of part of period cost.

3. MARGINAL or VARIABLE or DIRECT COSTING
The revenue arising from the sales over variable costs is technically known as Contribution under marginal costing.
Marginal costing is considered superior to absorption costing so far as managerial decision making is considered. It identifies only such costs with the jobs or products which directly vary with the level of output. Consequently the cost of goods in inventory or cost of goods sold under this method does not contain any fixed overhead cost.
Thus the uncertainty and irrationality associated with apportionment of fixed cost in traditional costing is thus avoided.

4. The cost sheet of bicycle will appear as follows:
MARGINAL COST contd.
A factory produces 500 bicycles per annum. The variable cost per by cycle is US$ 100. the fixed expenses are US$ per annum.
The cost sheet of bicycle will appear as follows:
US $
Variable cost (500 X US$ 100)
Fixed cost ___
60000___
If production is increased by one unit i.e. if it becomes 501 bicycles per annum, the cost sheet will appear as follows :
Variable cost (501 X US$ 100)
Fixed cost ___
60 100___
The marginal cost is therefore US$ 100

5. DIFFERENCE BETWEEN ABSORPTION COSTING AND VARIABLE (MARGINAL COSTING)
Recovery of Overheads: In case of absorption costing, both fixed and variable overheads are charged to production while in case of marginal costing only variable overheads are charged to production.
Valuation of stocks: Absorption costing of stocks of work-in-progress and finished goods are valued at work cost and total cost of production respectively. Work cost and cost of production is defined to include fixed overheads too.
While in marginal costing, only variable costs are considered while computing the value of work-in-progress or finished goods. Thus, closing stock is undervalued in marginal costing as compared to absorption costing.

6. DIFFERENCE BETWEEN ABSORPTION COSTING AND VARIABLE (MARGINAL COSTING)

7. CONTRIBUTION and PROFIT
Contribution is the difference between selling price and variable cost. It is sum of fixed cost and profit.
Contribution or Gross Margin = Selling Price (total revenue) – Variable Cost (marginal cost)
Contribution= (Variable cost + Fixed cost + Profit) – variable cost
Contribution= Fixed cost + Profit
Or, Profit = Contribution – Fixed cost
Or, Fixed cost = Contribution – profit

8. CONTRIBUTION or GROSS MARGIN contd.
Let us take an example.
Variable cost Rs 5000
Fixed cost Rs. 2000
Selling Price Rs 8000
Contribution = Selling price – variable cost
= Rs 8000 – Rs 2000
= Rs 3000
Profit = Contribution – fixed cost
= Rs 3000 – Rs 2000
= Rs 1000
As contribution exceeds fixed cost, there is a profit of Rs
If fixed cost is assumed as Rs 4000, the position will change as:
Contribution – fixed cost = Negative Profit (loss)
= Rs 3000 – Rs 4000
= Rs 1000
The sum of Rs 1000 represents the extent of loss since the fixed costs are more than the contribution. At the level of foxed cost of Rs 3000, there shall be no profit and no loss. The concept of break-even analysis arises out of this basic fact.

9. Direct Material per unit
Example 1: Tripura Ltd is manufacturing three product : A, B, C. the cost of manufacture are as follows A B C
Direct Material per unit
Rs 3
Rs 4
Rs 5
Direct labour per unit
Rs 2
Selling price per unit
Rs 10
Rs 15
Rs 20
Output
1000 units
The total overhead costs are Rs out of which Rs are fixed and the rests are variable. It is decided to apportion these costs over different products in the ratio of output. From the above data, prepare a statement of cost and profit according to Marginal Costing.

10. Statement showing Profit And Cost
Example 1: solution
Statement showing Profit And Cost
(Marginal Costing )
Product A_____
_____Product _B __
____Product C _____
Per unit Rs
Total
Direct material
Direct labour
Variable Overheads
Total Marginal Cost
Contribution (Sales – MC)
Selling price 3 2 1
3000
2000
1000 4
4000 5
5000 6
6000 8 7
8000 10
10000 15
15000 20
20000 s

11. Total profit under marginal costing would be: Total Contribution Rs.
Example 1: solution contd.
Total profit under marginal costing would be:
Total Contribution Rs.
Product A
Product B
Product C
Less: Fixed Cost
Product A
Product B
Product C
Profit

12. Direct Material per unit
Example 2: Tripura Ltd is manufacturing three product : A, B, C. the cost of manufacture are as follows A B C
Direct Material per unit
Rs 3
Rs 4
Rs 5
Direct labour per unit
Rs 2
Selling price per unit
Rs 10
Rs 15
Rs 20
Output
1000 units
The total overhead costs are Rs out of which Rs are fixed and the rests are variable. It is decided to apportion these costs over different products in the ratio of output. Prepare a statement showing the cost and profit of each product according to marginal costing.
Calculate amount of profit and profit and loss made by Tripura Ltd in the first two years of its existence, presuming that
In the first year, it manufactures 1000 units of each product A, B, C but fails to effect any sales.
In the second year, it does not produce anything but sells the entire stock carried forward from the first year.
What fallacious conclusions can be drawn from the results.

13. Profit and loss Account of 1st Year (as per marginal costing)
Solution : Example2
Tripura Limited
Profit and loss Account of 1st Year (as per marginal costing) Rs
Direct material A B C
Direct labour
Overhead:
variables A B C
Fixed
3000
4000
5000___
2000
4000___
_12000__
___33000_
Sales
Closing Stock
Loss
-----
24000
9000
________

14. Profit and loss Account of 2nd Year (as per marginal costing)
Solution : Example 2 contd.
Tripura Limited
Profit and loss Account of 2nd Year (as per marginal costing) Rs
Opening Stock
Fixed overhead
Profit
24000
9000
12000
_______
45000__
Sales A B C
10000
15000
20000_
______
45000_
The above Profit and Loss accounts shows that the company suffered a loss of Rs.9000 in the first year because of non-recovery of fixed overheads while in the second year it makes a profit of Rs It may be seen from the profit and loss account that the fixed cost of one year has been carried forward to the next year. Thus, the profit and loss account gives the correct picture according to marginal costing.

15. Direct Material per unit
Example 3: Tripura Ltd is manufacturing three product : A, B, C. the cost of manufacture are as follows A B C
Direct Material per unit
Rs 3
Rs 4
Rs 5
Direct labour per unit
Rs 2
Selling price per unit
Rs 10
Rs 15
Rs 20
Output
1000 units
The total overhead costs are Rs out of which Rs are fixed and the rests are variable. It is decided to apportion these costs over different products in the ratio of output. From the above data, prepare a statement of cost and profit according to Marginal Costing.
Compute the amount of profit under absorption costing and marginal costing in case units of goods sold of products A, B, C are 900 each.

16. Statement showing Profit And Cost
Example 3: solution
Statement showing Profit And Cost
(Absorption Costing )
Product A_____
_____Product _B _____
____Product C _____
Total Rs
Direct material
Direct labour
Variable Overheads
Total Marginal (variable) Cost
Add: Fixed Overheads
Total cost of production
Less: Closing Stock
Cost of goods sold
Profit (sales – cost of goods sold)
3000
2000
1000
4000
5000
6000
8000
10000
9000
900
11000
1100
13000
1300
8100
9900
3600
11700
6300
Sales
13500
18000

17. Total profit under absorption costing is Total Profit Rs._______
Example 3: solution contd.
Total profit under absorption costing is
Total Profit Rs._______
Product A
Product B
Product C Rs 10800

18. Statement showing Profit And Cost
Example 3: solution
Statement showing Profit And Cost
(Marginal Costing )
Product A_____
_____Product _B _____
____Product C _____
Total Rs
Direct material
Direct labour
Variable Overheads
3000
2000
1000
4000
5000
Total Marginal Cost
Less: Closing Stock
Cost of goods sold
Contribution (Sales – MC)
Sales
6000
600
8000
800
10000
5400
3600
7200
6300
9000
13500
18000

19. Total profit under marginal costing would be: Total Contribution Rs.
Example 3: solution contd.
Total profit under marginal costing would be:
Total Contribution Rs.
Product A
Product B
Product C
Less: Fixed Cost
Product A
Product B
Product C
Profit Rs. 9900