# Introduction to Marginal Costing

## What is Marginal Cost?

The cost incurred to produce one extra (additional) unit is called marginal cost.

$$MC = \frac{\Delta C}{\Delta Q}$$

## Is Marginal Cost the same as Variable Cost?

Yes — for CA Inter we assume that fixed cost does not change with output. Since only variable cost changes with units, Variable Cost = Marginal Cost at the CA Inter level.

## Treatment under Marginal Costing

In marginal costing, variable cost is given more importance than fixed cost. Fixed cost is NOT considered in valuation of stock (closing stock of WIP / FG is valued at variable cost only).

## Income Statement Format (Marginal Costing)

```

Sales

(–) Variable Cost

----------------

CONTRIBUTION

(–) Fixed Cost

----------------

PROFIT

```

## CVP (Cost–Volume–Profit) Analysis

CVP analysis studies the relationship between three important elements:

1. Sale Price

2. Cost (Variable & Fixed)

3. Volume / Output

It helps us understand how profit gets affected when any one of the above factors changes — useful for pricing, planning and decision-making (make-or-buy, shut-down, sales mix, etc.).

Worked example

### Example 1

Effect of changing variables (CVP sensitivity)

Base case: SP/unit = ₹10, Qty = 100, Cost/unit = ₹6 → Profit = (100×10) − (100×6) = ₹400.

Scenario	SP	Qty	Cost/u	Sales	Cost	Profit
Base	10	100	6	1,000	600	400
Case I (SP↓ to 9)	9	100	6	900	600	300
Case II (Qty↑ to 200)	10	200	6	2,000	1,200	800
Case III (Cost↑ to 7)	10	100	7	1,000	700	300

Observation — profit is most sensitive to a quantity (volume) change in this illustration (₹400 → ₹800).

⚠️ Common exam mistakes

Including Fixed Cost in stock valuation — under marginal costing, only variable cost is included in valuing WIP and Finished Goods.
Confusing Contribution with Profit — Contribution = Sales − Variable Cost (still has to absorb Fixed Cost before becoming profit).
Treating Marginal Cost ≠ Variable Cost. At CA Inter level (fixed cost assumed constant), MC and VC are equal.
Forgetting that CVP analysis assumes selling price per unit, variable cost per unit and fixed cost remain constant within the relevant range.

Reference:

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Introduction to Marginal Costing & CVP Analysis

Worked example

⚠️ Common exam mistakes