Marginal costing considers fixed cost as periodcost. It strongly believe that fixed cost are forbusiness and need not be apportioned.

Hence period cost in totality are reduced from Totalcontribution to arrive at Net Profit. The result (total netprofit) would be the same both in Total costing &marginal costing only the presentation style differs.

Semi variable or semi fixed costs are required to beclassified in the individual components of fixed costand variable cost

Marginal costing is formally defined as:

‘the accounting system in which variable costs are

charged to cost units and the fixed costs of the

period are written-off in full against the aggregate

contribution. Its special value is in decision making’

The term ‘contribution’ mentioned in the formal definition is the term given to the difference between Sales and Marginal cost. Thus

MARGINAL COST =

VARIABLE COST DIRECT LABOUR+

DIRECT MATERIAL+

DIRECT EXPENSE+

VARIABLE OVERHEADS

The Profit Volume (PV) Ratio is the ratio of Contribution over Sales. It measures the Profitability of the firm and is one of the important ratios for computing profitabilty.

Profit Volume or P/V Ratio or C/S ratio = Contribution to Sales x 100 or as % of

Changes in profits= Changes in sales

i.e.Sales x P/V ratio = Contribution

i.e. Contribution x 100 = P/V ratioSales

Break Even Point (BEP) – Situation of no profit no

loss. i.e.

when contribution is just enough to cover fixed costs i.e.

Contribution = Fixed Costs.

In terms of quantity = Fixed costs

Contribution per unit

In terms of amount = Fixed cost

P/V ratio

Sales beyond break even point.

A high margin of safety = Much below BEP than actual sales

A low margin of safety with high fixed costs & high P/V ratio = efforts are required to reduce fixed cost or increase sales volume

A low margin of safety with low P/V ratio = Efforts are required to reduce variable cost or increase selling price

Margin of Safety = Sales – BEP

Margin of Safety = Profit

P/V Ratio

Classification of fixed and variable cost is difficult. Some

cost like Direct labour cost though variable, but

especially in India where workers have legal protection,

labour cost is not variable in nature.

In today’s era of automation, fixed costs are sizable in

nature. In such case ignoring them completely is not

wise many a times.

It does not provide any standard for evaluation like

standard or budgetary costing

Fixation of selling price or profitability analysis based on

marginal costing is useful in short terms only.

3000 UNITS FORMULA PER UNIT 40000 UNITS

300000SALES 100 4000000

(-) 210000 (-) VARIABLE COST

(-) 70 (-) 2800000

90000CONTRIBUTION

30 1200000

(-) 90000 (-) FIXED COST

(-) 90000

00000PROFIT OR LOSS

1110000

P.V RATIO = CONTRIBUTION PER UNIT X 100

SALES PER UNIT= 30 X100

100PV RATIO = 30%

BEP = FC = 90000 = 300000RS

PV 30%

BEP(In Units) = FIXED COST = 90000

CONTRIBUTION 30

= 3000 units

Marginal Costing supports the managerial decision

making process . By the usage of this technique, the

manager can evaluate the positional standing of theconcern to a certain extent.