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Marginal Costing

Marginal costing is an accounting method that values inventory and production costs based solely on variable costs, treating fixed costs as period costs. It contrasts with absorption costing, which includes both fixed and variable costs in product costs, impacting decision-making and financial analysis. The document also outlines income statements under both costing methods, detailing the calculation of net income before and after taxes.

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18 views4 pages

Marginal Costing

Marginal costing is an accounting method that values inventory and production costs based solely on variable costs, treating fixed costs as period costs. It contrasts with absorption costing, which includes both fixed and variable costs in product costs, impacting decision-making and financial analysis. The document also outlines income statements under both costing methods, detailing the calculation of net income before and after taxes.

Uploaded by

nancysinghal95
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Marginal Costing

Definition and Concept of Marginal Costing & Marginal Cost

 Marginal Costing: An accounting method that values inventory and production costs based
only on variable costs. Fixed costs are treated as period costs and not attributed to
production.

 Marginal Cost: The cost of producing one additional unit of a product. It includes only the
variable costs (e.g., direct materials, direct labour, and variable overheads).

Marginal Costing Vs Absorption Costing


Aspect Marginal Costing Absorption Costing

Cost Calculation Considers only variable costs Considers both fixed and variable costs

Fixed Costs
Treated as period costs Allocated to each unit produced
Treatment

Useful for short-term decision Provides a comprehensive view of total cost


Decision
making and analyzing contribution but may lead to sub-optimal decisions in some
Making
margin cases
Income Statement under Absorption Costing & Marginal Costing
a. Absorption Costing
- Direct Labour Cost (b) XX
- Variable Manufacturing overheads (c ) XX
- Fixed Manufacturing overheads (d) XX XXX
C. Total Cost of Goods Manufactured (a+b+c+d) XXX
D. Cost of Inventory at the Beginning of the Year XXX
Add (Units X Total Cost)
E. Cost of Inventory at the End of the Year XXX
Less (Units X Total Cost)
F. Cost of Goods Manufactured and Sold (C+D-E) XXX
G. Gross Margin Manufacturing (Unadjusted) (A-F) XXX
XXX
H. Adjustment for Capacity Variance
(Favourable: Add
Unfavourable: Less)
I. Gross Margin Manufacturing (Adjusted) (G±H) XXX
Less J. Non Production Cost
- Sales & Distribution Cost XX
- Administrative Expenses XX
- Other Non-Manufacturing Cost (If any) XX XXX
K. Net Income Before Taxes XXX
Less L. Income Taxes XXX
M. Net Income After Taxes XXX
b. Marginal Costing
Operation Particulars Amount Amount
A. Sales XXX
(Sale Price X Quantity Sold)
B. Variable Cost (Production Cost)
- Direct Material Cost (a) XX
- Direct Labour Cost (b) XX
- Variable Manufacturing overheads (c ) XX
C. Total Cost of Goods Manufactured (a+b+c) XX
D. Cost of Inventory at the Beginning of the Year XX
Add (Units X Variable Cost)
E. Cost of Inventory at the End of the Year XX
Less (Units X Total Cost)
F. Cost of Goods Manufactured and Sold (C+D-E) XXX
G. Contribution Margin Manufacturing (A-F) XXX
Less: H. Variable Non Production cost
- Selling & Distribution Cost XX
- Administrative Cost XX
- Other Costs, if any XX XXX
I. Contribution Margin (Final) (G-H) XXX
Less J. Fixed Cost
- Fixed Production Cost XX
- Fixed Non-Production Cost XX XXX
K. Net Income before taxes (I-J) XXX
Less L. Income Taxes XXX
M. Net Income After taxes XXX

Example-1
Example-2

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