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Marginal Costing in Managerial Decision Making PDF
Marginal Costing in Managerial Decision Making PDF
Application of Marginal
Costing in Managerial
Decision Making of
N M CREATIONS
Submitted by:-
• Abbas Chitalwala 03
• Abhee Parmar 04
• Bhawin Saraiya 29
• Jagruti Patti 54
• Arun Mishra 24
Page | 1
PREFACE
Page | 2
ACKNOWLEDGEMENT
Page | 3
EXECUTIVE SUMMARY
Page | 4
CONTENTS
2 Introduction 7
3 Marginal Costing 10
Concepts
5 Marginal Costing 12
Analysis
6 Marginal Costing & 14
Decision Making
7 Conclusion 15
8 Bibliography 16
Page | 5
N M CREATION
11B GIRI KUNJ , N.S.PATKAR MARG, MUMBAI 400 007.
INTRODUCTION
Page | 6
The costs that vary with a decision should only be included in decision
analysis. For many decisions that involve relatively small variations from
existing practice and/or are for relatively limited periods of time, fixed costs
are not relevant to the decision. This is because either fixed costs tend to
be impossible to alter in the short term or managers are reluctant to alter
them in the short term.
Suppose a business occupies premises to carry out its activities. There is a
downturn in demand for the service which the business provides and it
would be possible to carry on the business from smaller, cheaper premises.
Does this mean that the business will sell its old premises and move on to
new ones overnight? Clearly, it cannot happen. This is partly because it is
not usually possible to find a buyer for the premises at a very short notice
and it may be difficult to move premises quickly where there is, let us say,
delicate equipment to be moved. Apart from external constraints on the
speed of move, the management may feel that the downturn might not be
permanent. Thus, it would be reluctant to take such a dramatic step. It
would mean to deny itself an opportunity of benefit from a possible revival
of trade. The business premises may provide an example of an area of one
of the more inflexible types of cost but most of the fixed costs tend to be
broadly similar in this context. So, what we really see is that more than the
fixed cost, what really influences decision making in the short-run is the
variable cost which is actually synonymous with the marginal cost.
Marginal costing is a technique of costing which analyses and presents
costing information to the management in such a manner that the right
decision is taken on managerial problems.
It is also a technique where only variable cost or direct cost will be charged
to the cost unit produced. Marginal costing shows the effect on profit of
changes in volume or type of output by differentiating between fixed and
variable costs. The analysis is segregated into short and long-run cases.
Page | 7
At each level of production and time period being considered, marginal costs
include all costs which vary with the level of production, and other costs are
considered fixed costs.
• All operating costs are differentiated into fixed and variable costs
• Fixed cost treated as period cost and written off to the profit and loss
account
• Stock valuations are not distorted with present years fixed costs
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• Its provide better information hence is a useful managerial decision making
tool
• The effect of production and sales policies is more clearly seen and
understood
• Marginal cost has its limitation since it makes use of historical data while
decisions by management relates to future events
• Stock valuation under this type of costing is not accepted by the Inland
Revenue as it ignores the fixed cost element
• It fails to recognize that in the long run, fixed costs may become variable
• It is not a good costing technique in the long run for pricing decision as it
ignores fixed cost. In the long run, management must consider the total
costs not only the variable portion
• Difficulty to classify properly variable and fixed cost perfectly, hence stock
valuation can be distorted if fixed cost is classify as variable
Page | 9
Marginal Costing Concepts
FORMULA:
S–V=F+P
Where,
2. P/V Ratio :
PV Ratio
4. Margin of Safety:
which is:
FINANCIAL STATEMENT
N M CREATION
Page | 11
Trading and P/L Account for the year ending
March 2008
Amount
Particulars (Rs) Particulars Amount(Rs)
To opening stock 18092527 By sales 82,806,180
To purchases 55841336
By closing stock 18,085,527
DIRECT EXPENSES
To warehouse charges 280,713
To consultancy expenses 63,000
To process charges 4,234,278
To transport charges 276,420
To yarn dyeing charges 1,864,938
To twisting charges 1,170,763
To weaving charges 12,946,768
To warping charges 479,600
100,891,707 100,891,707
INDIRECT EXPENSES
To audit fees 13,500
To advertisement expenses 9,600 By gross profit 5,641,364
To bank int & charges 22,779 By disc.rec. 7,000
To brokerage on sales 430,990
To comp maintainance 3,000
To int on o/d 223,204
To depreciation 923,851
To electricity exp. 915,324
To int on loan 1,598,306
To petrol & diesel exp. 237,069
To professional fees 7,500
To salary & bonus 610,000
To telephone exp. 44,446
To misc.exp. 12,000
To int on partners cap 479,278
To insurance charges 30,000
To car exp. 21,810
To loan processing charges 4,500
5,648,364 5,648,364
Page | 12
Classification of Costs
Amount(Rs Amount(Rs.
Fixed Costs .) Variable Costs )
(Rs)
Purchase 55841336
4,259,631 78485342
Particulars Rs.
SALES 82,806,180
CONTRIBUTION 4320838
PROFIT 61207
If nm creations were to accept the order then it would increase their plant
utilisation to 100% from the existing 80%. However Marginal Costing
Analysis helped understand the profitability of the deal better. It is shown
as follows:
Comparing the revised profit i.e. Profit arising after accepting the Import
assignment (“C”) with the original profit i.e. Profit prevalent after rejecting
the Import assignment, we can see that Marginal Costing enables us to
reach a conclusion and make a Managerial Decision.
If “C” > Existing Profit then the manager will accept the import
assignment.
If “C” < Existing Profit then the manager will reject the import
assignment.
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N.B: We have made assumptions regarding the amounts (figures)
of the import assignment as the figures are confidential and the
organization could not disclose them.
CONCLUSION
Page | 15
BIBLIOGRAPHY
Books:
Himalaya Publication
Sites:
• Wikipedia
http://en.wikipedia.org/wiki/marginal_cost
• Google
http://www.google.com/
• www.accountingcoach.com
• http://www.referenceforbusiness.com/encyclopedia/
Oli-Per/costingmethods.html
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