Introduction to Marginal Costing (Cambridge International A-Level Accounting)

Exam board Cambridge International · A-LevelUpdated 2026-02-25

Introduction to marginal costing

What is marginal costing?

Marginal costing is a costing method where only variable costs are charged to products
Marginal costing looks at the cost of producing one additional unit

How is marginal costing different to absorption costing?

Marginal costing is different to absorption costing because fixed costs are not included in production cost
Fixed costs are treated as period costs and written of in the period incurred

Marginal costing	Absorption costing
Only variable manufacturing costs are included in the production cost	Both variable and fixed manufacturing costs are included in the production cost
Fixed overheads treated as expenses in the period incurred.	Fixed overheads included in production cost.
Lower inventory valuation (as it doesn't include fixed overheads)	Higher inventory valuation (includes fixed overheads)
Profit depends on sale volume	Profit depends on sales volume and production volume (higher profit when production is greater than sales)

Contribution

Spec point — how to calculate the contribution of a product

How do I calculate the contribution of a product?

Contribution is the amount available to cover fixed costs
- $\mathrm{Contribution}=\mathrm{Sales} \mathrm{revenue}-\mathrm{Variable} \mathrm{cost}$
You might be asked to find the contribution per unit
- $\mathrm{Contribution} \mathrm{per} \mathrm{unit}=\mathrm{Selling} \mathrm{price} \mathrm{per} \mathrm{unit}-\mathrm{Variable} \mathrm{cost} \mathrm{per} \mathrm{unit}$

How do I calculate the contribution to sales ratio?

The contribution to sales ratio is the proportion of the revenue which equals the contribution
- $\mathrm{Contribution} \mathrm{to} \mathrm{sales} \mathrm{ratio}=\frac{\mathrm{Contribution}}{\mathrm{Revenue}}$
You should give your answer as a percentage by multiplying by 100

Worked Example

$
Revenue 100 000
Direct materials 10 000
Direct labour 6 000
Other direct costs 3 000

The table above shows the information for 9 000 units of a product sold.

Calculate:

(a) the total contribution

(b) the contribution per unit

(c) the contribution to sales ratio.

Answer:

(a)

Calculate the total variable cost

Variable costs = Direct materials + Direct labour + Other direct costs
= \$10 000 + \$6 000 + \$3 000 *
= \$19 000 *
Subtract the variable cost from the revenue

Contribution = Revenue - Variable costs

= $100 000 - $19 000

Final answer: Contribution is $81 000

(b)

Divide the total contribution by the number of units

81 000 ÷ 9 000 = $9

Final answer: Contribution per unit is $9

(c)

Divide the total contribution by the revenue

$\frac{81000}{100000}=0.81$

Multiply by 100 to turn into a percentage

Final answer: Contribution to sales ratio is 81%

	$
Revenue	100 000
Direct materials	10 000
Direct labour	6 000
Other direct costs	3 000

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Exam QuestionsTraditional costing methods FlashcardsTraditional costing methods

Marginal costing

Absorption costing

Only variable manufacturing costs are included in the production cost

Both variable and fixed manufacturing costs are included in the production cost

Fixed overheads treated as expenses in the period incurred.

Fixed overheads included in production cost.

Lower inventory valuation (as it doesn't include fixed overheads)

Higher inventory valuation (includes fixed overheads)

Profit depends on sale volume

Profit depends on sales volume and production volume (higher profit when production is greater than sales)

	$
Revenue	100 000
Direct materials	10 000
Direct labour	6 000
Other direct costs	3 000

Revenue

100 000

Direct materials

10 000

Direct labour

6 000

Other direct costs

3 000