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The marginal cost of an item is its variable cost. The marginal production cost of an item is the sum of its direct materials cost, direct labour cost, direct expenses cost (if any) and variable production overhead cost. So as the volume of production and sales increases total variable costs rise proportionately.
Fixed costs, in contrast are cost that remain unchanged in a time period, regardless of the volume of production and sale.
Marginal production cost is the part of the cost of one unit of production service which would be avoided if that unit were not produced, or which would increase if one extra unit were produced.
From this we can develop the following definition of marginal costing as used in management accounting:
Marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution.
Note that variable costs are those which change as output changes - these are treated under marginal costing as costs of the product. Fixed costs, in this system, are treated as costs of the period.
Marginal costing is also the principal costing technique used in decision making. The key reason for this is that the marginal costing approach allows management's attention to be focused on the changes which result from the decision under consideration.
Marginal cost concept is used in Marginal costing .
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