Marginal Cost Definition & Formula
Marginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit and it is calculated by dividing the change in the costs by the change in quantity.
Marginal cost is the change in the total cost of production upon a change in output that is the change in the quantity of production. In short, it is the change in total cost that arises when the quantity produced changes by one unit. Mathematically, it is expressed as a derivative of the total cost with respect to quantity.
- Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of a normal unit
- Change in Quantity = Total quantity product including additional unit – Total quantity product of normal unit
How to Calculate Marginal Cost? (Step by Step)
Below are the steps to calculate marginal cost –
- Consider the total output, fixed costFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity., variable cost, and total cost as input.
- Prepare a production graph considering a different quantity of output.
- Find the change in cost i.e., a difference in the total cost of production, including additional unit and total cost of production of the normal unit.
- Find the change in quantity, i.e., total quantity product, including additional unit and total quantity product of normal unit.
- Now, as per the formula of Marginal cost divide change in cost by a change in quantity, and we will get marginal cost.
A manufacturing company has a current cost of production of 1000 pens at $1,00,000, and its future output expectation is 2000 pens with the future cost of production of $1,25,000. So the calculation of the marginal cost will be 25.
|Current Unit of Production||1000|
|Current Cost of Product||$100,000.00|
|Future Unit of Production||2000|
|Future Cost of Production||$125,000.00|
|Marginal Cost Formula||25|
- Change in Total cost = $1,25,000 – $1,00,000 = $25,000
- Change in Quantity = 2000 – 1000 = 1000
- Marginal Cost = 25000/1000
- = 25
Marginal Cost Formula in Excel (with excel template)
Now let us take the case mentioned in the above example to illustrate the same example in the excel template below.
In below template is the data of the manufacturing company for the calculation.
So the total calculation of marginal cost will be-
Marginal Cost Calculator
You can use the following Calculator.
|Marginal Cost Formula =||
Uses and Relevance
- Marginal Cost Formula is used in financial modelingFinancial ModelingFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact. to optimize the generation of cash flow.
- It is used to calculate the incremental cost of production.
- It helps to make production decisions.
The marginal cost at each level of production includes additional costs required to produce the unit of product. Practically, analyses are segregated into short-term, long-term, and longest term. At each level of production and period being considered, it includes all costs which vary with the level of production, and other costs are considered fixed costs whereas practically there in inflation, which affects the cost in the long run and may increase in future.
Several factors affect the marginal cost and application. Some of them are considered a market failure. It also includes information asymmetries, the presence of externalities, transaction costs, etc.
Marginal cost can be said as an extra expense on producing one additional unit. It helps management to make the best decision for the company and utilize its resources in a better and profitable way as with quantity profit increase if the price is higher than this cost.
This article has been a guide to Marginal Cost Formula and its definition. Here we learn how to calculate the marginal cost and its uses along with practical examples. You can learn more about Accounting from the following articles –