The marginal cost of production is the cost required to produce an additional unit of product or service. It is a commonly calculated figure to derive economically optimal decisions for a company.
Marginal Cost FormulaThe formula for calculating marginal cost is: Marginal Cost = Change in Cost / Change in Quantity If a company's total cost of production is calculated as TC = Fixed Cost + (Quantity x Variable Cost), then its marginal cost would simply be equal to its variable costs: MC = dTC / dQ = VC Where: TC = Total cost FC = Fixed cost Q = Quantity VC = Variable cost MC = Marginal cost However in many cases, a one unit increase/decrease in production might not result in a proportional increase/decrease in costs. This is due to different types of cost behaviors such as unit costs (variable cost), batch costs (step-fixed cost), product cost (fixed cost), etc.
Types of Marginal CostsDue to the different types of cost behaviors, the marginal costs might not always vary directly proportionally with the number of units. Below is a list of types of marginal costs:
1. Unit CostsUnit cost is the traditional type of variable costs where one unit increase in production causes a proportional increase in costs.
2. Batch CostsBatch costs usually vary by the number of batches for a given number of units produced.
3. Product CostsProduct costs are directly related to a particular item on a product portfolio. For example, the cost to design a product.
4. Customer CostsCustomer costs relate to the number of customers which the company provided service to.
5. Organization Sustaining CostsOrganizational sustaining costs are incurred as a result of operating activities of a business.
More Useful ResourcesRead CFI's guide on marginal cost of production to better understand the concept and application. CFI Marketplace also has a wide collection of accounting templates available for download and use in your daily financial analysis and modeling!
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