Marginal Costing

What is the MC of a product?

• additional cost incurred in producing one additional unit of the product.

• This includes TVCs = including direct materials, direct labour, direct expenses and variable overheads

• fixed overheads are not included as the total fixed production overhead will not increase as a result of making one additional unit.

• Fixed overheads are treated as a period cost and deducted in full within the statement of profit or loss.

How do you calculate Contribution?

• CONTRIBUTION = SALES VALUE – VARIABLE COSTS

• Once the contribution from a product or service has been calculated, the fixed costs can be deducted to determine the profit for the period.

   

What else can Contribution be used for?

• Can be used to calculate profit:

• Total contribution = Contribution per unit × Sales volume.

• Profit = Total contribution – Fixed costs

What is the Absorption Cost of a product?

• full cost of producing a unit of the product.

• This will include the total of the variable costs, including direct materials, direct labour, direct expenses and variable overheads and fixed production overheads

When will inventory levels change?

• In a period where more/less inventory is produced than is sold, inventory levels will change and the profits under marginal and absorption costing will differ.

• Marginal costing values inventory at the total variable production cost of a unit of product while absorption costing values inventory at the full production cost of a unit of product.

Inventory values will be different at the beginning and end of a period under marginal and absorption costing.