Principles of Marginal Costing
The principles of marginal costing are as given:
1. Period fixed costs are similar, for any volume of sales and production provided such the level of activity is in the 'relevant range'). Thus through selling an extra item of product or service of the following will occur:
- Revenue will raises via the sales value of the item sold,
- Costs will raises via the variable cost per unit,
- Profit will raises via the amount of contribution earned from the extra item.
Like same, if the volume of sales falls via one item, the profit will fall via the amount of contribution earned from the item. Profit measurement must hence be based on an analysis of total contribution. Because fixed costs relate to a period of time, and do not change along with decreases or increases in sales volume, it is misleading to charge units of sale along with a share of fixed costs from net contribution for the period to derive a profit figure. While a unit of product is made, the extra/additional costs incurred in its manufacture are the variable production costs. Fixed costs are not affected, and no extra fixed costs are incurred while output is raises. Therefore it is argued such the valuation of closing stocks should be at variable production cost or direct materials, direct expenses, direct labour whether any and variable production overhead as these are the only costs properly attributable to the product.