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Marginal costing is a technique of cost accounting and managerial decision-making in which only variable costs are considered as the cost of production, while fixed costs are treated as period costs and are written off in full against the contribution of the period. The central idea of marginal costing is that costs behave differently with changes in the level of output, and therefore they should be classified into variable and fixed components for better analysis and control. Variable costs vary directly with the level of activity, whereas fixed costs remain constant within a relevant range regardless of output. Marginal costing focuses on the marginal cost, which is the additional cost incurred in producing one more unit of output, and this marginal cost is generally equivalent to variable cost per unit. The primary objective of marginal costing is to assist management in planning, controlling, and decision-making. It is particularly useful in short-term decisions such as pricing, product mix, make-or-buy decisions, acceptance of special orders, and determination of the break-even point. Unlike absorption costing, marginal costing does not allocate fixed manufacturing overheads to units of production; instead, these costs are charged in total to the profit and loss account of the period in which they are incurred. This approach provides clearer insight into how changes in sales volume affect profit. A key concept in marginal costing is contribution. Contribution represents the amount that each unit of sale contributes towards covering fixed costs and thereafter generating profit. It is calculated as the difference between sales revenue and variable costs. Contribution can be expressed in absolute terms, per unit terms, or as a ratio. In its simplest form, contribution equals sales minus variable costs. _____ _________ _____ ________ _____ _______ _______ ______.
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