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

Contribution = Sales – Variable Cost Contribution = Fixed Cost + Profit

Contribution

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

Thank you