Marginal Costing is the technique of segregating fixed and variable costs and thereafter arriving at the cost which would vary in proportion to the volume of production or sales.
Experts defines the Marginal Costing as “The amount at any given volume of output by which aggregate cost is change, if the volume of the output is increased or decreased by one unit.”
For Example: If the Cost Of production of 10,000 Units = Rs. 1,00,000
And for 10,001 Units = Rs. 1,00,008 Then Rs.8 is the Marginal Cost of 1 additional unit.
If the increase in output is more than one, the total increase in cost divided by the total increase in output will give the average marginal cost per unit.
For Ex: If the Cost Of production of 10,000 Units = Rs. 1,00,000
And for 10,020 Units = Rs. 1,00,100 Then Rs.5 is the Marginal Cost of 1 additional unit.
Additional cost Rs.100 = Rs.5.00
Additional units 20
Marginal cost means the cost of the marginal or last unit produced.
Marginal cost varies directly with the volume of production and marginal cost per unit remains the same.
It Involves Following
Fixed Cost = Rents, Taxes, Interest etc.
Variable Cost = Direct Material, Direct Wages etc.
Contribution = Fixed Cost + Profit
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