Marginal Costing

Marginal Cost: the cost of producing one extra unit of output

Contribution per unit: amount of money coming in from sales after variable costs are paid

Contribution per unit = selling price per unit - variable cost per unit

Total contribution = sales income - variable costs of the units sold in a period 

The total contribution that the sales of all the units in the period make are towards the business' fixed costs. After they are covered, the remainder of the contribution is profit.

Profit = total contribution - total fixed costs

Marginal costing statement: Sales revenue - variable costs = contribution - fixed costs = profit

Marginal costing advantages: contribution is clearly identified, as the marginal cost of output is identified the managers can focus on the contribution provided by the output, effect on costs of changes in sales revenue can be calculated, helps with decision-making: costing, make or buy, acceptance of additional work, price setting, optimum use of scarce resources