marginal costing: meaning, definition, pronunciation and examples
C1Formal / Technical
Quick answer
What does “marginal costing” mean?
A cost accounting technique that separates variable and fixed costs, charging only the variable costs to units of output.
Audio
Pronunciation
Definition
Meaning and Definition
A cost accounting technique that separates variable and fixed costs, charging only the variable costs to units of output.
A managerial accounting approach for decision-making that focuses on the changes in total costs and revenues resulting from a specific change in activity, such as producing one more unit or accepting a special order. It's foundational to break-even analysis and profitability planning.
Dialectal Variation
British vs American Usage
Differences
The term is standard in both, but 'variable costing' is a more common synonymous term in American business jargon. In the UK, 'marginal costing' is the dominant pedagogical and professional term.
Connotations
Identical; it is a neutral technical term in both varieties.
Frequency
Higher frequency in UK business and academic contexts. In the US, 'variable costing' may be encountered with equal or greater frequency, especially in corporate settings.
Grammar
How to Use “marginal costing” in a Sentence
[Subject] uses marginal costing to [infinitive verb phrase]The decision was based on a marginal costing [noun phrase]We analysed the project via marginal costing.Vocabulary
Collocations
Examples
Examples of “marginal costing” in a Sentence
verb
British English
- The management team decided to marginal cost the new product line before finalising the budget.
American English
- We need to marginal-cost this special order to see if it's profitable.
adjective
British English
- The marginal-costing statement clearly showed the contribution per unit.
American English
- Their marginal-costing approach simplified the pricing model.
Usage
Meaning in Context
Business
Essential for pricing decisions, break-even analysis, and evaluating the profitability of specific products or orders.
Academic
A core topic in management accounting, economics, and business studies courses.
Everyday
Virtually never used in everyday conversation.
Technical
The precise term used in accounting standards, financial modelling, and managerial reports.
Vocabulary
Synonyms of “marginal costing”
Strong
Neutral
Weak
Vocabulary
Antonyms of “marginal costing”
Watch out
Common Mistakes When Using “marginal costing”
- Using it as a synonym for 'cheap' or 'low-cost'.
- Confusing it with 'standard costing' or 'activity-based costing'.
- Incorrect pluralisation (*marginal costings). It is a non-count noun.
FAQ
Frequently Asked Questions
Marginal costing includes only variable costs in product cost, treating fixed costs as period costs. Absorption costing includes both variable and a share of fixed production costs in the product cost, thus valuing inventory higher.
Generally, no. Accounting standards like GAAP and IFRS typically require absorption costing for external financial statements because it matches all manufacturing costs to the product. Marginal costing is primarily for internal management decisions.
Contribution is sales revenue minus variable costs. It's the amount that contributes to covering fixed costs and generating profit. Marginal costing analysis focuses heavily on this figure.
It is most useful for short-term tactical decisions: setting special order prices, determining product mix when capacity is constrained, performing break-even analysis, and deciding whether to make or buy a component.
A cost accounting technique that separates variable and fixed costs, charging only the variable costs to units of output.
Marginal costing is usually formal / technical in register.
Marginal costing: in British English it is pronounced /ˈmɑːdʒɪnəl ˈkɒstɪŋ/, and in American English it is pronounced /ˈmɑːrdʒɪnəl ˈkɔːstɪŋ/. Tap the audio buttons above to hear it.
Phrases
Idioms & Phrases
- “It's a marginal cost decision”
- “on the margin”
Learning
Memory Aids
Mnemonic
Think of the 'margin' of a page where you add a note. Marginal costing is about the 'note' or cost you add for just one more unit on the 'margin' of your total production.
Conceptual Metaphor
ACCOUNTING IS MEASUREMENT (of incremental change).
Practice
Quiz
Which of the following is a key outcome of using marginal costing?