Example of Marginal Costing

Example of Marginal Costing

Marginal costing also known as variable costing method under which only variable cost is deducted from the sales to calculate contribution and fixed cost is deducted as period cost. Under marginal costing the stock is also valued at variable cost therefore the profit calculated under marginal costing differ from the profit calculated under absorption costing.

Example of Marginal Costing without inventory

In following example the basic concept of marginal costing has explained.

Sales Price per unit	400 per unit
Direct Material	260 per unit
Skilled Direct Labor	30  per unit
Direct Expenses	30   per unit
Lightening of Factory	50,000
Heating Factory	50,000
Output produced and Sold	1500 units

Calculated profit under Marginal Costing

Solution

	Units	Rate	Total
Sales	1500	400	600,000
Less: Variable Cost	1500	(260+30+30)= 320	(480,000)
Contribution			120,000
Less: Fixed Cost		(50,000+50,000)	(100,000)
Profit			20,000

In first place the total contribution is calculated by deducting the variable cost from the sales and then fixed cost is deducted as period cost.