It is an utterly different cost accounting method. Under this method, we do not pay attention to the fixed overheads as they continue to happen even at zero production activity. So fixed cost is treated as period cost and is not included in the unit cost of the product.
Formula
Marginal cost = Direct materials + Direct labours + Variable overheads per unit
Marginal Costing Profit and Loss Specimen
In marginal costing, we calculate contribution margin (CM) initially by subtracting total variable costs from sales revenue. After that, we subtract fixed cost from CM to arrive at profit figure.
| Sales Revenue | xxx |
| Variable costs | (xx) |
| Contribution margin -CM | xxx |
| Fixed Cost | (xx) |
| Profit | xx |
Example Question
Alpha industry has the annual turnover of $3,000,000 with output of 200,000 units. The direct materials, direct labours, variable costs are $2, $3 and $4 per unit. The fixed overheads are $1,000,000. Prepare profit and loss account over the marginal costing method.
Solution Answer
| Sales Revenue | 3,000 |
| Variable costs (400,000 + 600,000 + 800,000) | (1,800) |
| Contribution margin -CM | 1,200 |
| Fixed Cost | (1,000) |
| Profit | 200 |