CA Intermediate · Cost and Management Accounting

Marginal Costing: formula sheet

Full chapter guide

Key formulas

Contribution: Contribution = Sales − Variable cost; Per unit: Contribution per unit = Selling price per unit − Variable cost per unit.
Profit: Profit = Contribution − Fixed cost; Also: Sales − Variable cost − Fixed cost. A negative result is a loss.
Fixed cost from data: Fixed cost = Contribution − Profit; Useful when profit and sales are given and fixed cost is missing.
Variable cost per unit: Variable cost per unit = Change in total cost ÷ Change in units; High-low method for splitting a semi-variable cost. Use the highest and lowest activity levels, not highest and lowest costs unless they coincide.
Fixed cost per unit: Fixed cost per unit = Total fixed cost ÷ Units produced; It changes with output. Total fixed cost does not (within the relevant range).
Stock valuation: Stock value (marginal costing) = Units × Variable cost per unit; Fixed cost is never included in stock under marginal costing.
Contribution: Contribution = Sales − Variable cost; Marginal costing statement shows contribution first, then deducts total fixed cost.
Marginal costing profit: Profit = Contribution − Fixed cost; Include fixed selling and administration cost here as well.
Absorption costing profit: Profit = Sales − Cost of goods sold (including fixed production overhead) − Selling and administration cost; Adjust for under or over absorption of overhead.
Fixed overhead absorption rate: Rate per unit = Budgeted fixed production overhead ÷ Budgeted output; Use the basis given in the question (normal or budgeted capacity).
Profit difference: Absorption profit − Marginal profit = (Closing stock units − Opening stock units) × Fixed production overhead per unit; If the rate differs between years, use closing stock × current rate − opening stock × previous rate.
Reconciliation rule: Production > Sales: Absorption profit higher. Production < Sales: Marginal profit higher. Production = Sales: equal.; Holds when the fixed overhead rate is the same in both periods.
Contribution: Contribution = Sales − Variable cost = Fixed cost + Profit; Per unit: Contribution per unit = Selling price per unit − Variable cost per unit.
P/V ratio: P/V ratio = (Contribution ÷ Sales) × 100; Also = (Change in profit ÷ Change in sales) × 100, when fixed cost is unchanged.
Break-even sales: BEP (₹) = Fixed cost ÷ P/V ratio; BEP (units) = Fixed cost ÷ Contribution per unit; Use the ratio in decimal or fraction form when dividing.
Margin of safety: MOS (₹) = Actual sales − BEP sales = Profit ÷ P/V ratio; MOS ratio = MOS ÷ Actual sales × 100.
Sales for desired profit: Required sales = (Fixed cost + Desired profit) ÷ P/V ratio; Units = (Fixed cost + Desired profit) ÷ Contribution per unit.
Profit from sales: Profit = Sales × P/V ratio − Fixed cost; Works when sales and P/V ratio are known.
Variable cost ratio: Variable cost ratio = 100% − P/V ratio; Check: P/V ratio + variable cost ratio = 100%.
Contribution per unit: Contribution per unit = Selling price per unit − Variable cost per unit; Sales − Variable cost gives total contribution.
P/V ratio: P/V ratio = Contribution ÷ Sales × 100 = Change in profit ÷ Change in sales × 100; The second form is used when two periods' data are given. Fixed cost is unchanged between them.
BEP in units: BEP (units) = Fixed cost ÷ Contribution per unit; Round up if units are fractional, since you cannot sell part of a unit and break even.
BEP in value: BEP (₹) = Fixed cost ÷ P/V ratio = BEP units × Selling price; Use P/V ratio as a fraction, not a percentage.
Target profit sales: Required sales (₹) = (Fixed cost + Target profit) ÷ P/V ratio; Units = (Fixed cost + Target profit) ÷ Contribution per unit; For a profit after tax, convert it first: Profit before tax = Profit after tax ÷ (1 − tax rate).
Margin of safety: MoS (₹) = Actual sales − BEP sales = Profit ÷ P/V ratio; MoS % = MoS ÷ Actual sales × 100; Profit ÷ P/V ratio is a quick check.
Multi-product BEP: BEP (₹) = Total fixed cost ÷ Composite P/V ratio; Composite P/V = Total contribution ÷ Total sales at given mix; Split BEP sales among products in the sales mix ratio.
Cash break-even point: Cash BEP = (Fixed cost − Non-cash fixed cost such as depreciation) ÷ Contribution per unit; Use only when asked for cash break-even.
Contribution: Contribution = Sales − Variable cost; Per unit or in total. Fixed cost is never deducted when comparing options.
Profit: Profit = Contribution − Fixed cost; Use it to check the final result of the chosen plan.
Make or buy rule: Buy only if purchase price < variable cost of making (plus any avoidable fixed cost per unit); If capacity freed has an alternative use, add the contribution lost or gained from that use.
Special order rule: Accept if price per unit > variable cost per unit (and spare capacity exists); Add any extra fixed cost caused by the order. If capacity is full, add the opportunity cost of lost contribution.
Limiting factor ranking: Contribution per unit of key factor = Contribution per unit ÷ Units of key factor per unit of product; Allocate the scarce resource to the highest ranking first, subject to demand limits.
Shutdown rule (short run): Continue if contribution > avoidable fixed cost; shut down if contribution < avoidable fixed cost; Unavoidable fixed cost is ignored. Consider also qualitative factors and effect on other products.
Marginal cost pricing floor: Minimum price = Variable cost per unit (plus opportunity cost, if any); Used for special orders, slack periods and export offers. Not suitable as a long-run price.
Break-even sales: BEP (units) = Fixed cost ÷ Contribution per unit; Useful to test a sales-mix or pricing change.

Quick revision

Marginal cost is the variable cost of one extra unit.
Contribution = Sales − Variable cost.
Profit = Contribution − Fixed cost.
P/V ratio = Contribution ÷ Sales × 100.
BEP (sales) = Fixed cost ÷ P/V ratio.
Margin of safety = Actual sales − Break-even sales.
Required sales for target profit = (Fixed cost + Target profit) ÷ P/V ratio.
Marginal costing values stock at variable cost only; absorption costing includes fixed production overhead.
When closing stock is higher than opening stock, absorption costing profit is usually higher.
With a limiting factor, rank products by contribution per unit of the limiting factor.
In a special order or shutdown choice, fixed costs that do not change are irrelevant.
Fixed cost per unit changes with volume; total fixed cost stays the same within the relevant range.

Common mistakes

Including fixed overhead in closing stock valuation under marginal costing. Fix: Under marginal costing, stock is at variable cost only. Fixed cost is charged in full to the period.
Treating contribution as profit. Fix: Contribution is before fixed cost. Profit is after fixed cost. Always deduct fixed cost as the last step.
Including fixed overhead in marginal stock valuation. Fix: Under marginal costing, value stock at variable cost only.
Applying the fixed overhead rate to selling and administration cost. Fix: Only fixed production overhead enters absorption stock. Selling and administration cost is a period cost in both methods.
Using profit instead of contribution to find the P/V ratio. Fix: P/V ratio = Contribution ÷ Sales. Profit alone ignores fixed cost.
Treating fixed cost as changing with output in the break-even formula. Fix: Use total fixed cost in CVP. It is constant in total within the relevant range.
Dividing fixed cost by selling price or by profit instead of contribution. Fix: Remember that fixed cost is recovered only from contribution. Always find contribution first.
Using the P/V ratio as 40 instead of 0.40 when finding BEP in value. Fix: Convert to a fraction or divide by the percentage and multiply by 100 in the same step.
Including unavoidable fixed cost in a make-or-buy or shutdown comparison. Fix: List fixed costs and mark each as avoidable or not. Only avoidable ones enter the comparison.
Ranking products by contribution per unit when a limiting factor exists. Fix: Divide contribution by units of the scarce resource per product, then rank on that figure.

Exam tips

In a theory question on advantages and limitations, give 4 to 6 points each with a one-line reason. Balanced answers score better.
In numericals, always show the contribution statement line by line. Step marks are given even if one figure is wrong.
Check whether the question gives units produced and units sold separately. Stock valuation questions depend on this.
Read for hidden variable costs such as sales commission or packing. Missing them changes contribution.
MCQs on this topic often test definitions: contribution, fixed cost behaviour and stock valuation. Revise these in one sitting.
Always compute stock units first. Most errors start there.
Show the reconciliation even if the question asks only for the profit difference. It earns easy marks.
Label under or over absorption clearly in the absorption statement. Examiners look for it.