Marginal costing is formally defined as the accounting system in which variable costs are charged to cost units and the fixed costs are treated as period costs and are written off in full against the aggregate contribution for that period.
In other words marginal costing is the costing method in which only variable costs are accumulated and cost per unit is ascertained only the basis of variable costs.
It should be clearly understood that marginal costing is not a method of costing like process costing and job costing. rather, it is simply a method or technique of the analysis of cost information for the guidance of management which tries to find out an effect on profit due to changes in the volume of output.
Marginal costing distinguishes between fixed costs and variable costs as conventional classified. The marginal costs of the product is its variable costs. This is normally taken to be direct labor, direct materials, direct expenses, and variable part of overheads.
The contribution is the term given to the difference between sales and marginal cost.
Contribution = sales – marginal cost
The contribution may be defined as the profit before the recovery of fixed costs. thus, the contribution goes toward the recovery of fixed cost and profit and is equal to fixed cost plus profit.
Alternative names for marginal costing are contribution approach, variable costing, differential costing, incremental costing and direct costing.
Under marginal costing, only variable manufacturing (production) cost becomes product cost. Fixed manufacturing costs together with non-manufacturing costs (period costs) are written off in the period in which they are incurred.