To study of the behavior of overheads in relation to changes in volume of
output reveals that there are some items of cost which tend to vary directly
with the volume of output where as, there are other which remain unaffected by
variations in the volume of output. The former class of cost represents the
variable overheads and the letter fixed overheads. Besides, there are certain
items of cost which are partly fixed and partly variable and are known as semi
variable or semi fixed costs.
The volume of output fluctuates from one period of time to another due to
seasonal and other factors. But fixed costs being same during each period,
fluctuation occur in unit cost of products produced during different periods,
thus necessitating comparison of cost from one period of time to another. To
obviate this uneven incidence of fixed costs on units of output fixed costs are
treated as period costs and excluded from product costs. Again once certain
facilities are installed, so long as there is no change in the installed
capacities, certain costs will have to be incurred whether or not the
facilities are being used at all or to whatever extent the facilities are used
from this stand point also, there is justification of excluding fixed costs
from the product costs. The essence of marginal costing technique lies in
considering fixed costs on the whole as separate, quite distinct from variable
costs which only are relevant to current operations. Variable costs only are
matched with revenues under different conditions of production and sales to
compute what is known as ‘contribution’ towards recovery of fixed costs and
yielding of profits. This is very useful from the point of decision making and
control.
According to the terminology of cost Accountancy
of the Institute of Cost London ,
Marginal cost represents “ the amount of any given volume of output by which
aggregate costs are changed if the volume of output is increased by one unit”.
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