Page 49 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II Manpreet Kaur, Lovely Professional University

Notes Unit 3: Absorption Costing and Marginal Costing

CONTENTS
Objectives

Introduction
3.1 Definition of Marginal Cost and Marginal Costing
3.2 Features of Marginal Costing

3.3 Differences between Marginal Costing and Absorption Costing
3.4 Summary
3.5 Keywords
3.6 Review Questions

3.7 Further Readings

Objectives

After studying this unit, you will be able to:
 Define marginal costing;

 Interpret the need for marginal costing;
 Explain the difference between absorption costing and marginal costing;
 Demonstrate the application of marginal costing.

Introduction

Marginal Costing is not a method of costing like job, batch or contract costing. It is in fact a
technique of costing in which only variable manufacturing costs are considered while
determining the cost of goods sold and also for valuation of inventories. In fact, this technique
is based on the fundamental principle that the total costs can be divided into fixed and variable.
While the total fixed costs remain constant at all levels of production, the variable costs go on
changing with the production level. It will increase if the production increases and will decrease
if the production decreases. The technique of marginal costing helps in supplying the relevant
information to the management to enable them to take decisions in several areas. In this unit,
the technique of marginal costing is explained in detail.

3.1 Definition of Marginal Cost and Marginal Costing

Marginal Cost is defined as, ‘the change in aggregate costs due to change in the volume of
production by one unit’. For example, if the total number of units produced are 800 and the total
cost of production is ` 12,000, if one unit is additionally produced the total cost of production
may become ` 12,010 and if the production quantity is decreased by one unit, the total cost may
come down to ` 11,990. Thus the change in the total cost is by ` 10 and hence the marginal cost
is ` 10. The increase or decrease in the total cost is by the same amount because the variable cost
always remains constant on per unit basis.

44 LOVELY PROFESSIONAL UNIVERSITY