Marginal Costing

Question 1

Definition of Marginal costing

Answer 1

Marginal costing is a costing system under which costs of production that vary with output are treated as product costs. This would usually include direct materials, direct labour and variable portion of manufacturing overhead. ​

Question 2

Formula for contribution per unit or per batch

Answer 2

Sales – Variable costs

Question 3

Benefits of Marginal costing

Answer 3

Benefits:
Allows a company to see the contribution margin on a product or service​

Useful for break even analysis ( e.g. what is Margin of safety on a product etc.)​

Useful for short term decision making. (i.e. how efficient is our variable costs management in contrast to our competitors in the previous month ?)​

Treats fixed costs as period costs and writes it off in full after aggregate contribution​

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Question 4

Disadvantages of Marginal costing

Answer 4

Under this approach, closing inventory is not valued in accordance with accounting standards (IAS 2, Inventories)​

Technique is not used in published accounts. Only used for internal decision making​

Fixed production overheads are not ‘shared’ out between units of production, but written off in full instead.