Marginal costing

Marginal costing

Marginal costing provides us with an alternative way of looking at costs that provides an insight into the way costs behave by allowing us to observe the interaction between costs, volumes and profits. The marginal cost of a product is equal to the cost of producing one more unit of output.

Accountants define marginal cost as: 

The amount by which aggregate costs change if the volume of output is increased or decreased by one unit.

 shows the behavior of costs based on the marginal cost concept. The vertical axis of shows aggregate costs and revenues in £. The horizontal axis shows the units of output. The fixed costs are shown as a straight line across all levels of output. Fixed costs are costs, which are unaffected by activity, at least in the short term.   assumes that such costs do not vary for the whole range of output possible.