CMA Intermediate · Cost Accounting
Marginal Costing for CMA Inter Cost Accounting
Marginal costing treats only variable costs as product costs and charges fixed costs to the period. Contribution = Sales − Variable cost. You use it to find profit, P/V ratio, break-even point and margin of safety, and to choose between options such as make or buy, or accept or reject an order.
What this chapter covers
Marginal costing is a way of looking at cost by behaviour. You split every cost into variable and fixed. Variable cost goes into the cost of a unit. Fixed cost is written off in the period. The key link is: Sales − Variable cost = Contribution, and Contribution − Fixed cost = Profit.
The chapter builds in layers. First you learn the marginal cost equation and the cost statement. Then you compare profit under marginal and absorption costing and reconcile the difference. Next comes cost-volume-profit analysis, with the P/V ratio, break-even point and margin of safety. Then you extend this to several products with a sales mix. Finally you use contribution to take decisions.
This chapter connects to the rest of the paper. It depends on cost classification and on the cost sheet, and on overhead absorption, which you need to understand absorption costing. It also leads into budgeting and standard costing, and into decision topics in Management Accounting. Strong marginal costing makes those chapters easier.
Marginal costing is numerical, scoring and predictable. Every question follows a small set of formulas, so a well-practised student can finish a question quickly and collect full step marks. The ideas also fit MCQs, where a quick P/V ratio or break-even calculation can be done in under two minutes with no negative marking. Written questions often combine two or three topics, such as a reconciliation followed by a break-even and a decision. If you master this chapter, you gain marks in the objective section and in the 14-mark questions, and you build the base for later papers.
Marginal Costing: topics in the order to study them
- 1Marginal Costing Concepts and Marginal Cost EquationEverything else uses contribution and the variable and fixed split, so you start here.
- 2Marginal Costing vs Absorption Costing Profit ReconciliationIt builds on the equation and shows how stock changes move fixed cost between periods.
- 3Cost-Volume-Profit Analysis and P/V RatioOnce contribution is clear, you can derive P/V ratio, break-even point and margin of safety.
- 4Multi-Product Break-Even and Sales Mix AnalysisIt extends single-product CVP, so you need those formulas firm first.
- 5Decision Making Using Marginal CostingIt applies all earlier tools to real choices, so you study it last.
How to prepare Marginal Costing
Work from formulas to layouts to mixed problems. Practise on paper, because the exam is written.
- Write the core relations from memory: Contribution = Sales − Variable cost, Profit = Contribution − Fixed cost, P/V ratio = Contribution ÷ Sales × 100.
- Practise the marginal cost statement layout until you can set it out without thinking. Show sales, variable cost, contribution, fixed cost and profit in order.
- For reconciliation, learn the rule: the profit difference equals fixed overhead per unit × change in stock units. Then check each answer against the direction of stock change.
- Solve CVP problems in a fixed sequence: find contribution per unit or P/V ratio, then break-even, then margin of safety, then target profit sales.
- For multi-product problems, calculate a weighted average P/V ratio or contribution per mix pack, and then test how a change in mix alters break-even.
- For decisions, always compare contribution and identify the limiting factor first. Ignore fixed costs that do not change with the decision.
- Finish with timed mixed sets. Do 15 MCQs in 30 minutes, then two written questions, and review every error.
Common mistakes in Marginal Costing
Treating semi-variable costs as wholly fixed or wholly variable
Fix: Separate the variable and fixed elements first, using the data given, before you compute contribution.
Getting the direction of the profit reconciliation wrong
Fix: Ask whether stock rose or fell. If it rose, fixed cost is carried forward in stock under absorption costing, so its profit is higher.
Using total sales when the P/V ratio needs the right base
Fix: Write the unit of each figure beside it. Use rupee sales with P/V ratio and units with contribution per unit.
Adding up individual product break-evens in a multi-product case
Fix: Use the combined fixed cost and the weighted average P/V ratio for the given sales mix.
Ranking products by contribution per unit when a limiting factor exists
Fix: Rank by contribution per unit of the scarce resource, such as machine hour or kg of material.
Including sunk or unchanged fixed costs in decision problems
Fix: List only the costs and revenues that differ between the alternatives, and state clearly why the others are ignored.
Last-day revision: Marginal Costing
- Contribution = Sales − Variable cost.
- Profit = Contribution − Fixed cost.
- P/V ratio = Contribution ÷ Sales × 100.
- Break-even sales = Fixed cost ÷ P/V ratio.
- Break-even units = Fixed cost ÷ Contribution per unit.
- Margin of safety = Actual sales − Break-even sales.
- Sales for target profit = (Fixed cost + Target profit) ÷ P/V ratio.
- Under marginal costing, stock is valued at variable cost only.
- Profit difference = Fixed overhead per unit × change in closing and opening stock units.
- If closing stock exceeds opening stock, absorption costing profit is higher.
- With a limiting factor, rank products by contribution per unit of that factor.
- Fixed costs unchanged by a decision are irrelevant to it.
Marginal Costing practice questions
- Sri Lakshmi Foods sells a snack at ₹50 per unit with variable cost of ₹30 per unit. Fixed costs are ₹2,40,000 per annum. What is the break-e…
- Which statement about the P/V ratio is correct, assuming selling price and variable cost per unit are constant?
- Under marginal costing, which of the following is treated as a period cost and charged in full to the Profit and Loss Account of the period …
- Sharma Textiles Ltd sells a product at Rs 80 per unit. Variable cost is Rs 50 per unit and fixed costs are Rs 3,00,000 per year. A special e…
- Sundaram Pens Ltd sells a product at Rs 50 per unit. Variable cost is Rs 30 per unit and total fixed costs are Rs 2,00,000. What is the P/V …
- Kaveri Textiles has a P/V ratio of 40% and fixed costs of Rs 6,00,000. Sales are Rs 20,00,000. What is its margin of safety in rupees?
- Which statement about contribution in marginal costing is correct?
- For Kaveri Foods, sales are Rs 10,00,000, the P/V ratio is 35% and fixed cost is Rs 2,50,000. What is the total variable cost?
Marginal Costing in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Marginal Costing: frequently asked questions
What is the difference between marginal costing and absorption costing?
Marginal costing charges only variable costs to products and writes off fixed costs in the period. Absorption costing charges both variable and a share of fixed costs to products. The result is that profits differ whenever opening and closing stock differ.
How should I solve a break-even question in the exam?
First find contribution per unit or the P/V ratio. Then divide fixed cost by that figure to get break-even units or sales. Show every step, since marks are given for the method as well as the answer.
Is marginal costing important for the MCQ section?
Yes. Many MCQs ask for a P/V ratio, break-even point, margin of safety or profit at a given sales level. These are quick if you know the formulas well. There is no negative marking, so attempt every one.
How do I decide which product to produce when resources are limited?
Find the limiting factor, such as machine hours. Work out contribution per unit of that factor for each product. Make the product with the highest figure first, subject to any demand limits.