Download - Marginal costing
MARGINAL COSTING
Submitted by: Swikar
K.HemanthDevesh Shukla
Harshad chandrakanthAparna.N
INDIAN INSTITUTE OF PLANTATION MANAGEMENT
Marginal cost is the change in the total
cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.
What is Marginal cost ??
Marginal cost – cost of producing an additional
unit or output or service Marginal costing differentiates the fixed and
variable costs
Basics of marginal costing
Semi-variable costs are included in
comparison of cost Only variable costs are considered Fixed costs are written off Prices are based on variable and marginal
contribution
Features Of Marginal Costing
Profit = Sales – Total cost Profit = Sales – (Variable cost + Fixed cost) Profit + Fixed cost = Sales – Variable cost Sales – Variable cost = Contribution = Fixed
cost + Profit Contribution – Fixed cost = Profit
Basic equation of Marginal Costing
It integrates with other aspects of
management accounting. Management can easily assign the costs to
products. It emphasizes the significance of key factors. The impact of fixed costs on profits is
emphasized. The profit for a period is not affected by
changes in absorption of fixed expenses. There is a close relationship between variable
costs and controllable costs classification. It assists in the provision of relevant costs for
decision-making.
Value Of Marginal Costing To Management
To segregate the total cost into fixed and variable components is a difficult task Under marginal costing, the fixed costs are eliminated for the valuation of inventory , in spite of the fact that they might have been actually incurred. In the age of increased automation and technological development, the component of fixed costs in the overall cost structure may be sizeable. Marginal costing technique does not provide any standard for the evaluation of performance. Fixation of selling price on marginal cost basis may be useful for short term only. Marginal costing can be used for assessment of profitability only in the short run.
Limitations Of Marginal Costing
This ratio indicates the contribution earned
with respect to one rupee of sales. It is also known as Contribution Volume or
Contribution sales ratio. Fixed costs remain unchanged in the short
run, so if there is any change in profits, that is only due to change in contribution.
Profit Volume (P/V) Ratio
This is a situation of no profit and no loss. It
means that at this stage, contribution is just enough to cover the fixed costs, i.e. Contribution = Fixed cost
Break-even Point (BEP)
These are the sales beyond the break-even
point. A business will like to have a high margin of
safety because this is the amount of sales which generates profits.
Margin of Safety = Sales – Break-even Sales
Margin Of Safety