The marginal cost of a product is the additional cost incurred in producing one additional unit of the product.

This will include the total of the variable costs requited to produce the unit, including direct materials, direct labour,direct expenses and variable production overheads.

Note that fixed overheads are notincluded in inventory valuation as the total fixed production overhead will not increase as a result of making one additional unit.

Fixed overheads are treated as a period cost and deducted in full within the statement of profit or loss

Marginal costing is the principal costing technique used in decision making.

The key reason for this is that the marginal costing approach allows management’s attention to be focused on the changes which result from the decision under consideration.