ASAccountingCambridge (CIE)Revision NotesCost and Management AccountingMarginal CostingIntroduction to Marginal Costing

Introduction to Marginal Costing (Cambridge (CIE) AS Accounting): Revision Note

Exam code: 9706

Seina Murakami

Written by: Seina Murakami

Reviewed by: Dan Finlay

Updated on

Introduction to marginal costing

What is marginal costing? 

  • Marginal costing is a costing method where only variable costs are charged to products 

  • Marginal costing looks at the cost of producing one additional unit

How is marginal costing different to absorption costing?

  • Marginal costing is different to absorption costing because fixed costs are not included in production cost

  • Fixed costs are treated as period costs and written of in the period incurred

Marginal costing

Absorption costing

Only variable manufacturing costs are included in the production cost

Both variable and fixed manufacturing costs are included in the production cost

Fixed overheads treated as expenses in the period incurred.

Fixed overheads included in production cost.

Lower inventory valuation (as it doesn't include fixed overheads)

Higher inventory valuation (includes fixed overheads)

Profit depends on sale volume

Profit depends on sales volume and production volume (higher profit when production is greater than sales)

Contribution

How do I calculate the contribution of a product? 

  • Contribution is the amount available to cover fixed costs 

    • Contribution スペース イコール スペース Sales スペース revenue スペース ひく スペース Variable スペース cost

  • You might be asked to find the contribution per unit

    • Contribution スペース per スペース unit スペース イコール スペース Selling スペース price スペース per スペース unit スペース ひく スペース Variable スペース cost スペース per スペース unit

How do I calculate the contribution to sales ratio? 

  • The contribution to sales ratio is the proportion of the revenue which equals the contribution

    • Contribution space to space sales space ratio space equals space Contribution over Revenue

  • You should give your answer as a percentage by multiplying by 100

Worked Example

$

Revenue

100 000

Direct materials

10 000

Direct labour

6 000

Other direct costs

3 000

The table above shows the information for 9 000 units of a product sold.

Calculate:

(a) the total contribution

(b) the contribution per unit

(c) the contribution to sales ratio.

Answer: 

(a)

Calculate the total variable cost

Variable costs = Direct materials + Direct labour + Other direct costs 

= $10 000 + $6 000 + $3 000 

= $19 000 

Subtract the variable cost from the revenue

Contribution = Revenue - Variable costs 

= $100 000 - $19 000 

Contribution is $81 000

(b)

Divide the total contribution by the number of units

81 000 ÷ 9 000 = $9

Contribution per unit is $9

(c)

Divide the total contribution by the revenue

fraction numerator 81 space 000 over denominator 100 space 000 end fraction equals 0.81

Multiply by 100 to turn into a percentage

Contribution to sales ratio is 81%

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Author
Reviewer
Seina Murakami

Author: Seina Murakami

Expertise: Accounting Content Creator

Seina studied Pharmacology at UCL, though her professional passion lies deeply in the world of accounting and finance. With an A* in CIE A-Level Accounting and extensive experience tutoring IGCSE and IAL students, she specializes in making complex financial concepts accessible. From developing comprehensive revision resources to collaborating with faculty on lesson materials, Seina is dedicated to helping students bridge the gap between struggling with content and mastering it.

Dan Finlay

Reviewer: Dan Finlay

Expertise: Maths Subject Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.