A costing method that assigns only variable costs to products and treats all fixed costs as period expenses charged to the profit & loss account.
Marginal Costing (also called Variable Costing or Direct Costing) separates costs into variable (change with output) and fixed (remain constant). Only variable costs (direct materials, direct labor, variable overhead) are included in product cost. Fixed overheads are treated as period costs and charged entirely to the P&L regardless of production or sales volume. This approach highlights the contribution margin (sales minus variable costs), making it ideal for short-term decision-making: pricing decisions, make-or-buy analysis, product mix optimization, and break-even analysis. While not permitted for external financial reporting under Ind AS 2 (which requires absorption costing), marginal costing is invaluable for internal management accounting.
Product X: Selling price ₹500, Variable cost ₹300, Contribution = ₹200/unit. Fixed costs: ₹8,00,000/month. Current sales: 5,000 units. Total contribution: 5,000 × ₹200 = ₹10,00,000. Profit: ₹10,00,000 − ₹8,00,000 = ₹2,00,000. Break-even: ₹8,00,000 ÷ ₹200 = 4,000 units.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Accounting standards (Ind AS 2, IAS 2) require that inventory includes all production costs including fixed manufacturing overhead. Marginal costing understates inventory (balance sheet) and overstates expenses when production exceeds sales. For statutory reporting, absorption costing is mandatory.
Use marginal costing for: pricing decisions, special order acceptance, product line profitability, make-or-buy decisions, and CVP analysis. Use absorption costing for: financial reporting, tax filing, long-term pricing, and government contracts that reimburse full cost plus margin.
A costing method that allocates all manufacturing costs — both fixed and variable — to each product unit, also known as full costing.
A financial analysis tool that examines the relationship between costs, sales volume, and profit to determine how changes in any of these affect profitability.
The point at which a business's total revenue equals total costs, resulting in neither profit nor loss.
A branch of accounting that records, classifies, analyzes, and allocates costs to products, services, or activities to help management make informed business decisions.
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