Question

Marginal costing is also known as....................

• A. Direct Costing
• B. Variable Costing
• C. Total Costing
• D. Incremental Costing

Answer 1

Answer:

B. Variable Costing

Marginal Costing and Variable Costing: An Overview

• Marginal costing is a method of costing where all fixed costs are excluded from the product cost.
• Under this technique, only the variable costs of production are considered as the cost of the product.
• Fixed costs are treated as period costs and are charged against the revenue of the period in which they are incurred.
• The term 'marginal' refers to the cost of one additional unit of output.
• Therefore, marginal costing is also known as Variable Costing.

Key Concepts in Marginal Costing:

• Contribution Margin: This is the difference between sales revenue and variable costs. It represents the amount available to cover fixed costs and contribute to profit.
  Formula: Contribution = Sales Revenue - Variable Costs
• Contribution Ratio (P/V Ratio): This is the ratio of contribution margin to sales revenue. It indicates the profitability of each unit of sale.
  Formula: P/V Ratio = (Contribution / Sales Revenue) * 100
• Break-Even Point (BEP): This is the level of sales at which total revenue equals total costs, resulting in zero profit or loss.
  BEP (in units) = Fixed Costs / Contribution per unit
  BEP (in sales value) = Fixed Costs / P/V Ratio

Applications in Management Decisions:

• Marginal costing is particularly useful for short-term decision making.
• It helps in determining the profitability of different products or product lines.
• It is used for decisions like: accepting or rejecting special orders, make or buy decisions, determining optimal sales mix, and setting selling prices.

Comparison with Absorption Costing:

• Absorption Costing (also known as Full Costing) includes both variable and fixed manufacturing overheads in the product cost.
• The key difference lies in the treatment of fixed manufacturing overheads. In marginal costing, they are expensed immediately, while in absorption costing, they are inventoried.

Relevance for Competitive Exams:

• Understanding the distinction between marginal and absorption costing is crucial.
• Questions often test the calculation of contribution, P/V ratio, and break-even points.
• The impact of changes in sales volume, selling price, and costs on profit can be assessed using marginal costing principles.