9706 · 2.2.3
Marginal costing
Marginal costing treats fixed costs as period costs — only variable costs go into inventory; contribution covers fixed costs and profit.
Need to know
What you need to know
- Variable costs per unit are constant, but the total variable cost changes with output.
- Fixed costs in total are constant within a relevant range, but the fixed cost per unit decreases as output increases.
- Marginal costing classifies costs by their behaviour (variable or fixed), not by their function (production or non-production).
- Semi-variable costs (e.g., a telephone bill with a fixed line rental and variable call charges) must be split into their fixed and variable components.
Explanation
Costing for decisions
- Variable cost — changes with output.
- Fixed cost — period expense, not in unit cost.
- Contribution = sales − variable costs.
- Profit = total contribution − fixed costs.