MARGINAL COSTING | ACCOUNTANCY &AUDITING|L-9|

What Is Marginal Costing?

Marginal costing in economics and managerial accounting refers to an increase or decrease in the total cost of production due to a change in the quantity of the desired output. It is variable, depending on the inclusion of resources required to produce or deliver additional unit(s) of a product or service.

Calculating marginal cost enables managers to make decisions on resource allocation, optimize the production and operation, control manufacturing costs, plan budget and profits, etc. It considers expenses incurred at each production stage, except for overhead pricing. The practice is common in manufacturing industries, allowing companies to achieve economies of scale.

Marginal costing is the increase or decrease in the overall cost of production due to changes in the quantity of desired output.

Managers can use it to make resource allocation decisions, optimize production, streamline operations, control manufacturing costs, plan budgets and profits, and so on.

In most cases, variable costs influence marginal costs. It can, however, consider fixed expenses in circumstances of increased output.

When a company’s marginal cost equals its marginal income, it maximizes profits while setting the selling price of a product or service.

How Does Marginal Costing Work?

The marginal costing technique is crucial for any business aiming to optimize the production of goods or delivery of services. The concept technically means extra costs added to the production cost due to additional unit(s). It helps companies determine the selling price of a product or service.

Marginal costing varies with the production level and volume. Based on this, it can be either short-run.

Marginal Costing Benefits

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In the other context, it is an essential tool for companies to maximize profits and achieve economies of scale

. It happens by producing to the point where the marginal cost equals marginal revenue. Manufacturing and selling an additional unit of a product or service generates marginal or sales revenue.

Marginal Costing vs. Absorption Costing Explained in Video

Marginal Costing Factors

In the production process, some resources remain constant regardless of how many extra orders the business receives. Such resources involve fixed costs

 that do not change with the production quantity, resulting in increased output. These mainly include overhead, administration, and sales costs.

On the other hand, the company may require a few resources to enhance the production speed for additional orders. Buying and maintaining these resources involve variable costs that keep changing with the output volume, increasing expenses. These usually include raw materials

 and labor costs.