Marginal Costing
A cost accounting technique focusing on variable production costs and contribution margin, used for short-term decision-making rather than external reporting.
Marginal Costing
A cost accounting technique that assigns only variable production costs to products, treating fixed manufacturing overhead as a period expense rather than a product cost, and emphasizing contribution margin for decision-making.
For instance, under marginal costing, a manufacturer would include direct materials, direct labor, and variable manufacturing overhead in product cost, but would expense fixed factory overhead in the period incurred, unlike absorption costing which includes all manufacturing costs in product valuation.
Also known as variable costing or direct costing, this approach highlights the relationship between costs, volume, and profit by separating fixed and variable costs. While not acceptable for external financial reporting under GAAP, marginal costing provides valuable information for internal decisions like make-or-buy analysis, product mix optimization, pricing special orders, and determining break-even points. It avoids the potential distortion caused by fixed cost allocations when production volumes fluctuate.