It is also known as variable costing or direct costing. This technique takes into consideration only the variable cost as product cost. Under this method, the fixed manufacturing costs are considered as period costs and charged directly to Profit and Loss Account.

As per CIMA, London, Marginal Costing is, "the ascertainment of marginal costs and the effect on profit of changes in volume or type of output by differentiating between fixed cost and variable cost".

Meaning of Marginal Cost and Contribution

Marginal Cost 

It is the cost incurred on producing an additional unit of production. In other words, it is the total variable cost. The marginal cost includes all the direct costs and variable overheads. According to CIMA London, the marginal cost is, "the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit". Per unit marginal cost will remain same irrespective of the level of production.

Contribution 

In marginal costing technique, contribution is the difference between the sales value and the marginal or variable cost of the product. This contribution covers the fixed cost and generates the profit. Contribution minus fixed expenses equals  profit. A detailed study based on the contribution made by each product or department helps in analyzing the relative profitability of that product or department. Mathematically, contribution can be expressed as follows:

Contribution = Selling Price - Marginal Cost  (or)

Contribution = Fixed Cost + Profit    (or)

Contribution - Fixed Cost = Profit.

Table 2: Ascertainment of Profit Under Marginal Costing

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