Marginal costing: The technique of Marginal Costing is a definite improvement over the technique of Absorption Costing. According to this technique, only the variable costs are considered in calculating the cost of the product, while fixed costs are charged against the revenue of the period. The revenue arising from the excess of sales over variable costs is technically known as Contribution under Marginal Costing.
The following example will help you in understanding the technique.
Example (i) : From the following data, Let us prepare a statement of cost and profit according to Marginal Costing Technique.
Statement of Cost and Profit
(According to Marginal Costing Technique)
| | Product A | Product B | Product C | ||||
| | Per Unit | Total | Per unit | Total | Per unit | Total | |
| | Rs. | Rs. | Rs. | Rs. | Rs. | Rs. | |
| 3 | 3,000 | 4 | 4,000 | 5 | 5,000 | |
| 2 | 2,000 | 3 | 3,000 | 4 | 4,000 | |
| Variable overheads | 1 | 1,000 | 1 | 1,000 | 1 | 1,000 | |
| Total marginal cost | 6 | 6,000 | 8 | 8,000 | 10 | 10,000 | |
| Contribution | 4 | 4,000 | 7 | 7,000 | 10 | 10,000 | |
| Selling price | 10 | 10,000 | 15 | 15,000 | 20 | 20,000 | |
Thus, the total contribution from the three products A, B and C is Rs. 21,000. The profit will now be computed as follows:
Total Contribution: Rs. 21,000
Fixed costs: Rs. 9,000
--------------
Profit Rs. 12,000
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Example (ii): Let us prepare the statement profit or loss account for the following data by using Marginal costing technique.
Profit loss account for first year
| | Rs. | | Rs. |
| Direct Material A B C Direct Labour A B C Variable Fixed overheads | 3,000 4,000 5,000 12,000 2,000 3,000 4,000 9,000 ----------------------------- 3,000 9,000 | Sales Closing stock Loss | -- 24,000 9,000 |
| | 33,000 | | 33,000 |
Profit loss account for second year
Rs. Rs.
Opening stock 24,000 Sales
Fixed overheads 9,000 A 10,000
B 15,000
Profit 12,000 C 20,000 45,000
--------- -------- ---------
45,000 45,000
The above statement shows that the company suffers a loss of Rs. 9,000 in the first year because of non-recovery of fixed overheads, while in the second year it makes a profit of Rs. 12,000. It may be seen from the two years ` Profit and Loss Accounts that the fixed cost of one year has not been carried forward to the next year, Thus, the profit and Loss Account gives a correct picture.
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