Marginal Costing: Selling price > Variable or Direct cost ---> part of the Fixed cost is absorbed by the margin.

Marginal costing is a useful way of emphasizing the marginal costs of production and services.

This information is of great help in making pricing decisions.

If the selling price is less than the variable cost (direct cost),

• the loss will increase as more units are sold, and
• managers will only want to do this in very exceptional circumstances, such as a supermarket selling baked beans as a loss leader.

If the selling price is greater than the variable cost,

• then the margin will absorb part of the fixed cost, and,
• after a certain point profits will be made.

Why some goods are sold very cheaply at certain time?

Marginal costing explains why some goods and services are sold very cheaply.

It explains,f or example, why airline tickets are sometimes available at extremely low prices for last-minute purchasers.

• Once an airline is committed to making a flight, an extremely high part of the cost of that flight can properly be regarded as a fixed cost.  The pilot's salary will be the same whether the plane is empty or full.  
• The variable cost (direct cost) is only the complimentary meals and few other items.  
• It therefore makes sense to make last-minute sales of unsold seats at low prices.
• As long as the selling price is greater than the variable cost, a contribution is made (absorbing part of the fixed cost).

A basic understanding of the principles of costing is important in business management.

Most non-financial managers instinctively know that costing is important.

Unfortunately, it is probably also true that most non-financial managers do not know very much about it.

This is a pity because it affects so many business decisions.

For example, the fixed costs of running a cruise ship do not vary (or realistically only vary slightly) according to the number of passengers is the reason that large last-minute price reductions are often available. (Think of that when you book your holiday.)

A basic understanding of the principles of costing is important in business management.

Do not overlook the value of marginal costing

When times are tough there is likely to be pressure on sales and margins.

In this situation, marginal costing could be very helpful.

It may be essential to cut fixed costs and it may be necessary to adjust prices.

Marginal costing should help you make the right decisions.