Marginal
costing is not a distinct method of costing like job costing, method
costing, operating costing, etc. but a special method used for marginal
decision making.In marginal costing, cost ascertainment in made on the basis of the nature of cost. It gives consideration to behavior of costs. In other words, the method has developed from a specific idea & expression of the nature & behavior of costs & their effect on the profitability of an undertaking.
Marginal costing is used to provide a basis for the interpretation of cost information to measure the profitability of different products, processes & cost middle in the coursework of decision making. It can, therefore, be used together with the different methods of costing such as job costing, Methods of Costing , etc., or even with other method such as standard costing or budgetary control.
Under Marginal Costing the product cost is determined on the basis of Variable cost of the product. Such cost is selected for the purpose of penetration pricing where the maximum sale cost = variable cost. As the sale cost is low management is always anxious about the recovery of fixed overhead.
So they need to calculate the volume of sales at which fixed cost will be recovered , profit will arise & the safety margin of the organization , as well as different short-term decision are to be taken by the management. Marginal Costing is a process which also divides costs in to categories, but of different nature. In this case costs are identified as being either fixed or variable, relative to the quantity of output:
Total Cost = Variable Costs + Fixed Costs
Marginal costing distinguishes between fixed and variable costs as conventionally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads.
The accounting process in which Absorption Vs Variable Costing are charged to cost units and fixed costs of period are written off in full against the aggregate contribution. Its special value is in recognizing cost behavior and hence aiding in decision-making.
The term ‘contribution’ mentioned in the definition is the term given to the difference between Sales and Marginal Cost.
Marginal Cost = Variable Cost = Direct Labour
+
Direct Material
+
Direct Expenses
+
Variable Overheads
Contribution = Sales - Marginal Cost
The term marginal cost sometimes refers to the marginal cost per unit & sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context.
http://www.theglobaltutors.com/finance-assignment-help/Marginal-Costing.aspx
