What is Marginal Costing?
Marginal costing is a cost accounting technique that charges only variable costs to products, treating fixed costs as period expenses. It is used for short-term decision-making and contribution margin analysis.
How It Works
- Separate costs into variable and fixed.
- Compute contribution margin = revenue – variable cost.
- Cover fixed costs from total contribution, with the surplus being profit.
Saudi Context
Saudi industrial firms use marginal costing to evaluate export pricing, special orders, and make-or-buy decisions under ZATCA transfer pricing rules.
Example
A product sells for SAR 100 with SAR 60 variable cost (40% contribution margin). At 100,000 units, total contribution is SAR 4 million, covering SAR 2.5 million fixed costs and leaving SAR 1.5 million profit.