CMA Intermediate · Management Accounting

Marginal Costing (Management Accounting): formula sheet

Full chapter guide

Key formulas

Marginal cost: Marginal cost = Direct material + Direct labour + Direct expenses + Variable overheads; Taken as variable cost per unit. Include variable selling and distribution cost when computing contribution.
Contribution: Contribution = Sales − Variable cost; Variable cost here includes variable production and variable selling costs.
Contribution per unit: Contribution per unit = Selling price per unit − Variable cost per unit; Multiply by units sold to get total contribution.
Profit: Profit = Contribution − Fixed cost; Fixed cost is the whole period's fixed cost, production and non-production.
Fixed cost per unit: Fixed cost per unit = Total fixed cost ÷ Units of output; Changes with output. It is why absorption costing unit cost changes with volume.
Stock valuation: Marginal costing: stock at variable production cost. Absorption costing: stock at variable plus absorbed fixed production cost; Non-production overheads are not included in stock in either method.
Profit difference: Difference in profit = Change in stock units × Fixed production overhead per unit; Valid when the overhead absorption rate is the same in the period. Absorption profit is higher when stock increases.
Profit difference: Absorption profit − Marginal profit = (Closing stock units − Opening stock units) × Fixed production overhead rate per unit; Use this when the fixed overhead rate is the same in both opening and closing stock. A negative answer means absorption profit is lower.
Reconciliation in rupees: Absorption profit = Marginal profit + Fixed overhead in closing stock − Fixed overhead in opening stock; Use this when the rate differs between periods. It always works because it uses rupee values.
Fixed overhead absorption rate: Rate per unit = Budgeted fixed production overhead ÷ Normal or budgeted production units; Based on normal or budgeted capacity, not actual production, unless the question says otherwise.
Contribution: Contribution = Sales − Variable cost of units sold (including variable selling cost); Marginal costing statement: Contribution − Total fixed cost = Profit.
Under/over absorption: Under-absorbed = Actual fixed overhead − (Actual production × Rate); Under-absorption reduces absorption profit. Over-absorption increases it. Marginal costing has no such adjustment.
Stock value per unit: Marginal: variable production cost only. Absorption: variable production cost + fixed overhead rate; Selling and distribution costs are excluded from stock under both methods.
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 and price and variable cost per unit are constant.
Variable cost ratio: Variable cost ratio = Variable cost ÷ Sales × 100 = 100% − P/V ratio; Use this to move between the two ratios.
Break-even sales (value): BEP (₹) = Fixed cost ÷ P/V ratio; Break-even units = Fixed cost ÷ Contribution per unit.
Sales for a target profit: Required sales (₹) = (Fixed cost + Target profit) ÷ P/V ratio; Units = (Fixed cost + Target profit) ÷ Contribution per unit.
Margin of safety: MoS (₹) = Actual sales − Break-even sales = Profit ÷ P/V ratio; MoS ratio = MoS ÷ Actual sales × 100.
Profit from margin of safety: Profit = Margin of safety × P/V ratio; Above break-even, only contribution counts, since fixed cost is already recovered.
Contribution per unit: Contribution per unit = Selling price per unit − Variable cost per unit; Total contribution = Sales − Total variable cost.
P/V ratio: P/V ratio = Contribution ÷ Sales × 100 = Change in profit ÷ Change in sales × 100; The second form works when you have two periods and fixed cost is unchanged.
BEP in units: BEP (units) = Fixed cost ÷ Contribution per unit; Round up to a whole unit if the question wants whole units.
BEP in value: BEP (₹) = Fixed cost ÷ P/V ratio = BEP units × Selling price; Use the ratio as a fraction or decimal, not as a percentage number.
Target profit sales: Required sales (units) = (Fixed cost + Target profit) ÷ Contribution per unit; Required sales (₹) = (Fixed cost + Target profit) ÷ P/V ratio; For a target profit after tax, first convert it to profit before tax: PBT = PAT ÷ (1 − tax rate).
Margin of safety: MOS (₹) = Actual sales − BEP sales = Profit ÷ P/V ratio; MOS ratio = MOS ÷ Actual sales; Profit ÷ P/V ratio is a quick shortcut.
Multi-product BEP: Composite BEP (₹) = Fixed cost ÷ Composite P/V ratio; Composite P/V ratio = Total contribution ÷ Total sales for the given mix; Split BEP between products in the sales mix ratio (by value).
Cash break-even point: Cash BEP = (Fixed cost − Non-cash fixed cost such as depreciation) ÷ Contribution per unit; Use when the question mentions depreciation and asks for cash break-even.
Contribution: Contribution = Sales − Variable cost; Per unit or in total. Fixed cost is not deducted when comparing options.
Profit: Profit = Contribution − Fixed cost; Use for the final profit under the chosen option.
Make or buy rule: Make if relevant cost of making < buying price; otherwise buy; Relevant cost of making = variable cost + avoidable fixed cost + opportunity cost, if any.
Special order rule: Accept if price > marginal cost (with spare capacity and no fixed cost change); Add any extra fixed cost and opportunity cost of the order to marginal cost.
Shut-down rule: Continue if Contribution > Avoidable fixed cost; Unavoidable fixed cost is ignored because it continues either way.
Key factor ranking: Contribution per unit of key factor = Contribution per unit ÷ Units of key factor per unit; Allot the scarce resource in the order of highest ranking, subject to demand limits.
Opportunity cost: Contribution forgone from the next best use of a scarce resource; Include it only if the resource is scarce.

Quick revision

Contribution = Sales − Variable cost.
Profit = Contribution − Fixed cost.
P/V ratio = Contribution ÷ Sales × 100.
Break-even units = Fixed cost ÷ Contribution per unit.
Break-even sales = Fixed cost ÷ P/V ratio.
Sales for a target profit = (Fixed cost + Target profit) ÷ P/V ratio.
Margin of safety = Actual sales − Break-even sales = Profit ÷ P/V ratio; MOS ratio = Margin of safety ÷ Actual sales = Profit ÷ Contribution.
Under marginal costing, stock is valued at variable cost only.
If production equals sales, marginal and absorption profits are the same, assuming the same fixed cost rates and no other differences.
When a key factor limits output, rank products by contribution per unit of that factor.
Fixed cost is treated as a period cost and is not carried in closing stock.
In a special order, accept it if price exceeds variable cost and spare capacity exists, unless other factors matter.

Common mistakes

Treating all overheads as fixed or all labour as variable Fix: Read the data for behaviour clues such as 'per unit' or 'per month'. Split semi-variable costs explicitly.
Leaving variable selling cost out of contribution Fix: Contribution = Sales − all variable costs, including variable selling and distribution. Only stock valuation uses production cost alone.
Adding fixed overhead to marginal costing stock value. Fix: Under marginal costing, stock carries only variable production cost. Underline this before you start.
Including selling and administration overheads in absorption stock value. Fix: Stock is valued at production cost only. Show selling and administration costs below gross profit under both methods.
Using total cost instead of variable cost to find contribution. Fix: Subtract only variable cost. Fixed cost is deducted from contribution to get profit.
Using Δ profit ÷ Δ sales when fixed cost has changed. Fix: Use it only when fixed cost is the same in both periods and price and variable cost per unit are constant. Otherwise compute contribution directly.
Dividing fixed cost by selling price less total cost per unit. Fix: Use only variable cost to find contribution. Fixed cost is the numerator, never part of the denominator.
Using the P/V ratio as 40 instead of 0.40. Fix: Convert the percentage to a decimal or fraction before dividing.
Including the full absorbed fixed cost in the make-or-buy comparison Fix: Use only variable cost plus fixed cost that can be avoided if you buy. Absorbed overhead that continues is ignored.
Rejecting a special order because the price is below total cost Fix: Compare with marginal cost when there is spare capacity. Accept if there is positive contribution and no effect on regular sales.

Exam tips

In MCQs, first check whether production equals sales. If it does, the two profits are equal and you can skip the long working.
In written answers, show the statement with clear lines: sales, variable cost, contribution, fixed cost, profit. Step marks follow these lines.
Always list stock valuation under each method separately, and state that selling overheads never enter stock.
Close theory questions with a brief interpretation, such as why marginal costing helps decisions while absorption costing is needed for external reporting and stock valuation.
For features and advantages, give four or five points with a one line reason each rather than a long list of headings.
Write the unit stock movement (opening, production, sales, closing) first. Examiners give step marks for it and it prevents most errors.
Show the reconciliation as a separate small statement with a clear heading, even if the question only asks for the profits. It helps a marker see you understand the cause.
Always add one sentence of interpretation: which method shows the higher profit, and that the difference is only a timing difference in fixed overhead.