PGP/SS/07-09 Saurabh JainWith an increase or decrease in production/output, fixed overheads remain constantwhile variable overheads changes.Thus, Fixed overheads should not be allocated to each individual department (i.e.apportion to production), rather they should be charged against the total funds arisingout of excess of selling price over total variable cost. This concept is known as MarginalCosting.It is the amount at any given volume of output – by which aggregate costs change if thevolume of output increases or decreases by one unit.Marginal Cost = (Total Cost – Fixed Cost) OR (Direct material + direct labour + other variable costs)
a. Marginal Costing and Direct CostingSome accountants say direct costs = variable costs but Electricity, Rent etc. are directcosts but not variable for one product.b. Marginal Costing and Differential Costing(1) Differential Cost – Net increase of decrease in total cost resulting from a variation inproduction. Here, fixed costs may also get affected besides the variable costs. (Whencost increases, it is known as Incremental Costs whereas when cost decreases, it is knownas Decremental cost). Under this, costs of various alternatives are compared with thedifferent revenues and decisions are taken on the basis of the maximum net gain. It helpswhile checking the viability of different projects.(2) Marginal Costing – Under this, fixed cost are also considered at some stage, itassumes the form of differential costing.c. Marginal Costing and Absorption CostingUnder AC
Full costs i.e. Fixed Cost + Variable Cost are charged to productionUnder MC
Only Variable costs are charged to production, fixed costs are ignored.d. Differences
BASIS ABSORPTION COSTING MARGINAL COSTING
Valuation of stocks Stocks of work-in-progress offinished goods are valuedat works cost (includingfixed work overheads) andtotal cost of production(including fixed work overheads and officeoverheads respectively)Result: - Undervaluation ofstocks.The two stocks are valuedat Marginal Costing.Absorption of Overheads All variable and fixedoverheads are absorbed toproduction.Actual fixed overheads arewholly transferred to costingprofit and loss account.