The cost of a product under marginal costing or variable costing includes only the variable costs of making the product. The variable costs include direct material, direct labour and variable overheads. Variable costs per unit approximate the marginal cost of making another unit of a product. Selling price minus variable costs adds up to contribution. Contribution is the amount of money available to cover the fixed costs and afterwards to contribute to profit. The fixed costs are treated as period costs and are expensed in the period incurred.Marginal costing can be used to assist in decision making in the following circumstances: acceptance of a special order, dropping a product, make or buy decision and to choose which product (mix) to produce when a limiting factor (resource) exists. The technique of marginal costing mainly concentrates on financial factors, for instance the company’s objective to maximise profit or to create wealth. But other non-financial or commercial implications with long term character are largely ignored.
