Marginal Costing

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. 


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 Revenuexxx
Variable costs (xx)
Contribution margin -CMxxx
Fixed Cost(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 Revenue3,000
Variable costs (400,000 + 600,000 + 800,000)(1,800)
Contribution margin -CM1,200
Fixed Cost(1,000)