Marginal costing is a technique where the goods are valued considering only the variable cost component of the product. When pricing or valuing the stocks goods are values considering only the marginal costs (I.e. goods are valued considering cost that varies in relation to the level of the activity. In other words goods are valued based on the variable cost of the production.) Marginal cost of a product can be calculated as follows:
Marginal cost per unit = Direct material cost per unit + Direct labour cost per unit + Other variable costs per unit
Fixed cost relavent to the period is deducted at the end of the period when the profit figure is calculated for the period. Profit calculation under marginal costing can be illustrated as follows:
| Sales Revenue (Selling Price X No of units sold) | XXXX | |
| (-) Marginal Cost of goods sold | ||
| Opening stock (Opening stock in units X Marginal cost per unit) | XXX | |
| (+) Production (Production level X Marginal cost per unit) | XXXX | |
| (-) Closing stock (Closing stock in units X Marginal cost per unit) | (XXX) | (XXXX) |
| Contribution for the Period | XXXX | |
| (-) Fixed cost of the Period | (XXX) | |
| Profit for the Period | XXXX | |
Illustration of profit calculation will be provided in the article “Comparison of Profit Calculation Under Marginal Costing and Absorption Costing”.
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