Marginal Costing Explained: Concepts, Examples & Frequently Asked Questions
Marginal costing is a vital concept in cost accounting, focusing on variable costs and their impact on decision-making. It is essential for school students, commerce undergraduates, and those preparing for competitive exams. Understanding this topic helps in analyzing costs, optimizing business strategies, and preparing for exam questions dealing with cost classification and pricing decisions.
| Cost Structure | Treatment in Marginal Costing | Treatment in Absorption Costing |
|---|---|---|
| Variable Costs | Included in product cost | Included in product cost |
| Fixed Costs | Treated as period cost (not included in inventory) | Included in product cost (part of inventory value) |
| Inventory Valuation | At variable cost only | At total cost (variable + fixed) |
| Contribution Margin | Used to analyze profit and decision-making | Not separately highlighted |
What is Marginal Costing?
Marginal costing is a cost accounting technique in which only variable costs are allocated to product units, while fixed costs are treated as period costs. This approach provides clarity in cost behavior and supports short-term decision-making, especially concerning pricing and production volume. It is highly relevant in exam pattern questions and business case studies.
Key Features of Marginal Costing
- Distinguishes clearly between variable and fixed costs.
- Useful for calculating contribution and break-even points.
- Helps management in taking make-or-buy or accept/reject order decisions.
- Fixed costs remain constant regardless of output, while variable costs change with the level of production.
- Inventory is valued at only variable cost, unlike other costing methods.
Major Terms and Formulae in Marginal Costing
| Term | Definition | Formula / Example |
|---|---|---|
| Marginal Cost | Cost of producing one extra unit | = Total Cost at (n+1) units – Total Cost at n units Example: Rs.60,400 - Rs.60,000 = Rs.400 for 1 unit |
| Contribution Margin | Excess of sales over variable cost | = Selling Price per unit – Variable Cost per unit |
| Break-even Point | Level where total revenue equals total costs | = Fixed Cost / (Selling Price per Unit – Variable Cost per Unit) |
| Profit/Volume (P/V) Ratio | Shows margin contribution; higher is better | = Contribution / Sales × 100 |
MCQs on Marginal Costing (with Answers and Explanations)
-
If the total cost of 1000 units is Rs.60,000 and that of 1001 units is Rs.60,400, then the increase of Rs.400 is _________.
a) Prime cost
b) All variable overheads
c) Marginal cost
d) None of the above
Answer: c
Explanation: Marginal cost is the added cost of one extra unit, i.e., Rs.400. -
Which of the following is true about marginal costing?
a) In marginal costing, fixed costs are treated as product costs
b) Marginal costing is not an independent system of costing
c) The elements of cost in marginal costing are divided into fixed and variable components
d) Both b and c
Answer: d
Explanation: Fixed costs are not assigned to product cost under marginal costing. -
The costing method where fixed factory overheads are added to inventory is called __________.
a) Activity-based costing
b) Absorption costing
c) Marginal costing
d) All of the above
Answer: b
Explanation: Only absorption costing includes fixed overheads in inventory value. -
While computing profit in marginal costing, ________.
a) The fixed cost gets added to contribution
b) The total marginal cost gets deducted from total sales revenue
c) The total marginal cost gets added to total sales revenue
d) None of the above
Answer: b
Explanation: Profit is calculated as Sales - Variable Costs - Fixed Costs. -
Which of the following assumptions are made while calculating marginal cost?
a) Total fixed cost remains constant
b) Total variable cost varies with output
c) All elements of cost can be split as fixed or variable
d) All of the above
Answer: d
Explanation: All are basic assumptions in marginal costing.
For more MCQ practice, students can refer to our Marginal Cost Formula and Break-even Analysis pages for solved examples and in-depth explanations.
Marginal Costing vs Absorption Costing
| Aspect | Marginal Costing | Absorption Costing |
|---|---|---|
| Fixed Costs | Treated as period cost | Included in product cost |
| Inventory Valuation | Only variable costs | Variable and fixed costs |
| Profit Calculation | Based on contribution margin | Based on total cost |
A common exam question asks about the key difference: Under marginal costing, inventories are valued at variable costs only, while absorption costing adds a portion of fixed costs as well. This comparison is central to understanding marginal cost accounting and frequently appears in commerce exams.
Application of Marginal Costing in Exams and Practice
Marginal costing is used in many business decisions, such as accepting special orders, determining minimum pricing, and maximizing profit by analyzing how changes in costs affect production. It appears in CBSE, CA Foundation, and B.Com level quizzes and is a foundational topic for case-based questions in school and competitive exams.
Downloadable MCQs, Further Study, and Internal Resources
Students often require a quick summary and downloadable material to revise marginal costing concepts. For printable PDFs, practice sets, and deeper reading, check out:
- MCQs on Marginal Costing with Answers PDF
- Fixed, Variable and Semi-Variable Costs
- Methods of Costing
- Cost Control and Cost Reduction
At Vedantu, we simplify Commerce topics to make your learning smooth and exam-ready.
In summary, marginal costing involves identifying and analyzing variable and fixed costs to aid business decisions. Mastering this topic is essential for students aiming to excel in commerce exams and for practical applications in business. Use the links above and Vedantu's study resources to strengthen your conceptual clarity and problem-solving skills.
FAQs on MCQs on Marginal Costing for Commerce Students
1. What is marginal costing with an example?
Marginal costing is a cost accounting method that considers only variable costs when determining the cost of a product. Fixed costs are treated as period costs and are not included in the cost of goods sold. For example, if a company produces 100 units at a variable cost of $10 per unit and fixed costs of $500, the marginal cost per unit is $10. If they produce 101 units, the total variable cost increases to $1010, making the marginal cost of the 101st unit $10.
2. How is the marginal cost calculated?
Marginal cost is calculated by finding the change in total cost divided by the change in quantity. This focuses on the cost of producing one additional unit. Alternatively, you can calculate it by determining the total variable costs and dividing by the number of units produced. This formula ignores fixed costs in the calculation as it’s focused solely on variable cost changes.
3. What is the main difference between absorption and marginal costing?
The primary difference lies in how they treat fixed costs. Absorption costing allocates fixed manufacturing overhead costs to each unit produced, while marginal costing treats all fixed costs as period costs, expensed in the period they are incurred, and not included in the cost of goods sold. This impacts inventory valuation and profitability calculations.
4. Under marginal costing, at what value is inventory shown?
Under marginal costing, inventory is valued at its variable production cost. This excludes fixed manufacturing overheads, unlike absorption costing, which includes them. This approach offers a clearer picture of the true variable cost of goods.
5. Can fixed costs affect marginal cost calculations in MCQs?
No, fixed costs do not directly affect marginal cost calculations. Marginal cost focuses solely on the change in variable costs associated with producing one more unit. However, understanding the relationship between fixed and variable costs is crucial for interpreting overall profitability and break-even analysis in MCQs.
6. What is marginal cost formula?
The marginal cost formula is generally represented as the change in total cost divided by the change in quantity. In simpler terms, it can be calculated as the total variable cost divided by the number of units produced, emphasizing only variable costs.
7. Which costing is based on variable cost?
Marginal costing is the costing method primarily based on variable costs. It only considers variable costs when determining the cost of a product, ignoring fixed costs in the per-unit cost calculation.
8. Marginal cost (MC) is given by?
Marginal cost (MC) is given by the change in total cost divided by the change in quantity produced. It represents the incremental cost of producing one additional unit. It is primarily focused on variable costs.
9. What is the difference between marginal and absorption costing?
Absorption costing includes both variable and fixed manufacturing costs in product costing, while marginal costing only includes variable costs. This difference affects inventory valuation and profit reporting, leading to different profit figures under each method.
10. Why do some companies prefer marginal costing over absorption costing?
Some companies prefer marginal costing because it provides a clearer understanding of the contribution margin and profitability of each product, aiding in short-term decision-making. It simplifies cost analysis by separating fixed and variable costs, and it's particularly useful for pricing decisions and break-even analysis.
11. How does marginal costing support decision making in uncertain markets?
Marginal costing helps decision-making in uncertain markets by focusing on the variable costs of production. In volatile markets, the focus is on covering variable costs and generating a contribution margin. This allows businesses to quickly adapt to changes in demand and prices and makes short-term decision making more efficient.
