The Topic Marginal Costing is relevant for UGC NET Commerce & Management as Follows:

Introduction

Marginal Cost is the cost of producing one more unit of a good. The essential feature is that the product or marginal costs i.e., those costs that are dependent on the volume of activity are separated from the period or fixed costs i.e., costs that remain unchanged with a change in the volume of activity.

Marginal Costing Income Statement

Sales   XX

(-) Variable Cost   XX

Contribution  XX

(-) Fixed Cost  XX

Profit  XX

Variable cost per unit remains constant; any increase or decrease in production changes the total cost of output.Total fixed cost remains unchanged up to a certain level of production and does not vary with increase or decrease in production.The relative profitability of products or departments is based on the contribution made available by each department or product.

Applications of Marginal Costing

Cost Ascertainment : Marginal costing technique facilitates not only the recording of costs but their reporting also. The classification of costs into fixed and variable components makes the job of cost ascertainment easier.

Cost Control :Bifurcation of costs into fixed and variable enables management to exercise control over production cost and thereby affect efficiency. In fact, while variable costs are controllable at the lower levels of management, fixed costs can be controlled at the top level. 

Decision-Making: Marginal costing through ‘contribution’ assists management in solving problems. Example – Pricing of products, Make or buy decisions, Product mix etc.

Practice Question

Which of the following is the correct formula for computing contribution in Marginal Costing?

A. Sales (-) Variable Cost

B. Sales (-) Fixed Cost

C. Sales (-) Variable Cost (-) Fixed Cost

D. Sales (-) Profit

Solution: A

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