ASCM-L10 — Marginal Costing
Understanding how variable costs are used in product costing and how contribution is calculated to support management decisions.
Learning Objectives
By the end of this lesson students should be able to:
• define marginal costing
• distinguish variable and fixed costs
• calculate contribution
• calculate contribution per unit
• prepare marginal costing statements
• compare marginal and absorption costing
• answer examination-style questions
CONCEPT OVERVIEW
What is Marginal Costing?
Marginal costing is a costing technique in which only variable production costs are charged to products.
Fixed costs are treated as period costs and written off against contribution.
Key Principle
Under marginal costing:
Product Cost
=
Variable Costs Only
Fixed Costs
=
Period Costs
MARGINAL COSTING VS ABSORPTION COSTING
| Marginal Costing | Absorption Costing |
|---|---|
| Variable costs only included in product cost | All production costs included |
| Fixed costs treated as period costs | Fixed overhead absorbed into products |
| Focuses on contribution | Focuses on gross profit |
| Useful for decision-making | Useful for inventory valuation |
ADVANTAGES & LIMITATIONS
Advantages
✓ Easy to understand
✓ Highlights contribution
✓ Useful for decision-making
✓ Assists cost control
✓ Forms basis for break-even analysisLimitations
✓ Ignores fixed cost absorption
✓ Not accepted for external inventory valuation
✓ Assumes costs can be clearly classified
✓ May oversimplify cost behaviourCOST CLASSIFICATION
Variable Costs
Variable costs change directly with output.
Examples:
✓ Direct Materials
✓ Direct Labour
✓ Variable Production Overheads
✓ Sales Commission
Fixed Costs
Fixed costs remain constant regardless of output.
Examples:
✓ Factory Rent
✓ Insurance
✓ Manager Salaries
✓ Depreciation
CONTRIBUTION
Contribution Formula
Contribution=Sales Revenue−Variable Costs
Contribution Per Unit
Contribution per Unit=Selling Price−Variable Cost per Unit
Profit Formula
Profit=Contribution−Fixed Costs
MARGINAL COSTING STATEMENT
Format
Sales Revenue
Less Variable Costs
= Contribution
Less Fixed Costs
= Profit
Example Statement
| £ | |
|---|---|
| Sales Revenue | 100,000 |
| Less Variable Costs | (60,000) |
| Contribution | 40,000 |
| Less Fixed Costs | (25,000) |
| Profit | 15,000 |
WORKED EXAMPLES
Example 1 — Contribution Per Unit
Selling Price:
£20
Variable Cost:
£12
Contribution:
£20 − £12
= £8 per unit
Example 2 — Total Contribution
Sales Revenue:
£150,000
Variable Costs:
£90,000
Contribution:
£60,000
Example 3 — Profit
Contribution:
£60,000
Fixed Costs:
£35,000
Profit:
£25,000
Structured Practice
Level 1 — Concept Check
Define:
a) Marginal Costing
b) Contribution
Level 2 — Application
Explain why contribution is important to management.
Level 3 – Examination Style Question
Selling Price:
£25 per unitVariable Cost:
£15 per unitSales:
4,000 unitsFixed Costs:
£30,000Calculate:
a) Contribution per unit
b) Total Contribution
c) Profit
(6 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
ACADEMIC SUPPORT NOTE
📌 Marginal costing is one of the most important AS Cost Accounting topics and forms the foundation for break-even analysis.
Students should master:
✓ Variable vs Fixed Costs
✓ Contribution Calculations
✓ Profit Calculations
✓ Marginal Costing Statements
✓ Comparison with Absorption Costing
🎥 Full worked examples are available in the YouTube Learning Library.
📩 Students may submit marginal costing doubts through the Student Doubt Support facility.
Proficiency Check
Learn → Practise → Apply → Evaluate
1. Can you distinguish fixed and variable costs?
2. Can you calculate contribution accurately?
3. Can you calculate contribution per unit?
4. Can you prepare a marginal costing statement?
5. Can you calculate profit using contribution?
6. Can you compare marginal and absorption costing?
If unsure, revisit:
• Cost Classification
• Contribution Formulae
• Marginal Costing Statements
• Worked Examples
Detailed Activity Solutions
Solution to Level 3 question
a)
Contribution per Unit
£25 − £15
= £10
b)
Total Contribution
4,000 × £10
= £40,000
c)
Profit
£40,000 − £30,000
= £10,000
HOW THIS TOPIC APPEARS IN THE EXAMINATION
Common examination tasks include:
✓ Contribution Calculations
✓ Profit Calculations
✓ Marginal Costing Statements
✓ Variable vs Fixed Cost Classification
✓ Marginal vs Absorption Costing Comparisons
✓ Interpretation Questions
Self-Assessment Checklist
□ I understand marginal costing
□ I can distinguish fixed and variable costs
□ I can calculate contribution
□ I can prepare marginal costing statements
□ I can calculate profit accurately
□ I can answer examination questions confidently
Continue Your Preparation
Go beyond the lesson with curated resources, examination practice and video learning.
PREMIUM RESOURCES
Master the topic with curated learning, revision and assessment resources
GUESS PAPERS
Prepare for the examination with complete Guess Paper packages and Mark Schemes.
VIDEO ON DEMAND
Watch, revise and strengthen your understanding with Shasha Academy videos.