MARGINAL COSTING

What do we study in Marginal Costing

Marginal Cost Marginal Costing Direct Costing Absorption Costing Contribution Cost-profit-volume analysis Break Even Analysis

Managerial decision Making

Marginal Cost
Marginal Cost is amount at any given volume of output by which aggregate costs are changed.. if volume of output is increased or decreased by one unit.
Aggregate Cost/ Total Cost= Variable Cost + Fixed Cost

 The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads.

The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context.

EXAMPLE Maruti Suzuki manufactures 100 Maruti800 cars in a month Variable cost per car = 140000 Fixed Cost = 45000 If the co. manufactures 101 cars Marginal Cost= 140000 * 101 = 014000

Marginal Costing Marginal costing is ascertainment of marginal cost by differentiating between fixed and variable costs and of the effect of changes in volume or type of output. What could be effect of changes
in Volume Or type of output?

 Changes in volume

One lakh unit

to 2 lakh units One model of car to another model of car

Type of Output

From one size of product to another

Continued..

Marginal costing is formally defined as: the accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making.

Theory of Marginal Costing

In relation to a given volume of output, additional output can normally be obtained at less than proportionate cost because within limits, the aggregate of certain items of cost will tend to remain fixed and only the aggregate of the remainder will tend to rise proportionately with an increase in output. Conversely, a decrease in the volume of output will normally be accompanied by less than proportionate fall in the aggregate cost.

Theory of Marginal Costing

If the volume of output increases, the cost per unit in normal circumstances reduces. Conversely, if an output reduces, the cost per unit increases. If an increase in output is more than one, the total increase in cost divided by the total increase in output will give the average marginal cost per unit. Additional cost = Marginal CostAdditional units

Marginal Costing Characteristics

Fixed & Variable Cost

Inventory Valuation

Contributi on

Pricing
Marginal costs as Product Costs Fixed Costs as variable costs

Marginal costing & Profit

Marginal Costing Characteristics

Segregation of fixed and variable costs

Semi variable costs are segregated into fixed and variable

Marginal Costing Characteristics

Marginal costs As Product Costs

Only variable costs are charged to products

Marginal Costing Characteristics

Fixed costs As period costs

Fixed Costs treated as period costs charged to costing P& L account.

Marginal Costing Characteristics

Inventory Valuation

WIP & Finished goods are valued at Marginal Cost

Marginal Costing Characteristics

Contribution S-V= C Profitability judged on contribution made

Pricing Pricing is based on contribution and marginal costs

Marginal Costing Characteristics A B C TOTAL

SALES ---------Less VC ---------___________________________________ Contribution_________________________ Less Fixed Cost -------___________________________________ Profit

Marginal Costing Characteristics

Contribution of A + Contribution of B + Contribution of C- Total Fixed Cost = Profit/Loss

Absorption Costing Absorption cost is a total cost technique under which total cost fixed and variable is charged to production. Inventory is also valued at total cost.
We will study marginal costing as a technique quite distinct from absorption costing.