MARGINAL COST:

Marginal cost is the additional cost of additional unit. In other words, it is the amount by which total cost increases by producing one additional unit. It is also the amount by which total cost decreases by not producing one additional unit. Hence, marginal cost is the amount at any given volume of output by which the total cost is changed if the volume of output is changed by one unit. Marginal cost may also defined as the variable cost incurred on a specific activity. In fact, marginal cost is the variable cost per unit. Thus, marginal cost comprises prime cost plus variable overhead. MARGINAL COST= PRIME COST + VARIABLE OVERHEAD.

MARGINAL COSTING:
Marginal costing is also known as variable costing. It is a technique of which is concerned with the change =s in cost and profits resulting from changes in the volume of output. Marginal costing may be defined as the ascertainment of marginal cost, and of the effect on profit, of changes in the volume or type of output, by differentiating between fixed and variable costs. The institute of cost and management accountants, London, has defined Marginal costing as the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs. Thus in marginal costing technique only variable costs are charged to operations , processes or products , leaving all indirect costs to be written off against profits in the period in which they arise. ASSUMPTIONS OF MARGINAL COSTING: The technique of marginal costing is based on the following assumptions: All elements of costs (ie., Production, administration and selling and distribution) are segregated into fixed and variable components. Fixed cost remains constant for the entire volume of output. Variable cost fluctuates directly in proportion to changes in the volume of output. The selling price per unit remains constant at all levels of activity. The volume of output is the only factor which influences the costs.

FEATURES OF MARGINAL COSTING: It is a technique of analysis and presentation of costs.

All elements of cost are classified into fixed and variable components. The variable costs are regarded as the costs of the products. Fixed cost is treated as period cost. It is charged to profit and loss accounts for the period for which it is incurred. The stocks of finished goods and work in process are valued at marginal costs only. Prices are determined on the basis of marginal cost by adding contribution which is the excess of sales over marginal cost of sales.

Marginal Costing Equation: Profit = Sales Total Cost. (Variable + Fixed Cost). Fixed Cost + Profit = Sales Variable Cost. The above equation termed as Marginal Costing equation. Fixed Cost: F.C ,as the name suggests, remain fixed in amount. The amount spent towards such an expensive remains the same irrespective of the Volume of production. They may have to be incurred even if there is no production. For ex: rent of factory building has to be paid irrespective of whether or not production is taking place. Ex: Salaries, Audit fees, go down rent etc., Variable Cost: Variable cost varies in direct proportion to the volume of production. No variable costs are included if production is stopped. As production increases, variable costs increase. However, Variable cost P.U will not change. For Ex: if it is estimated that 2 units are required to produce 1 unit of finished product, then material cost will continue to increase as the number of units finished stock desired increases. All direct costs are Variable cost. Commission to sales persons, Certain taxes., etc. Semi -Variable Cost: S.V.C change with the changes in out put of production, but the change not proportionate. For the purpose of analysis, S.V.C are split in to Fixed Cost and Variable Cost. S.V.C normally has a fixed cost component, which needs to be incurred irrespective of no. of units produced. Telephone expenses are a example of S.V.C. Telephone exp. Can be split in to a fixed component of a rent, that needs to be paid whether or not the telephone is used. The charge for every call made constitutes the variable component. Two point Method: Under this method, the out put at two different levels is compared with corresponding amount of semi variable expenses. Since fixed costs, the change in amount of expenses is on account of variable costs, divided by the change in out put, gives the variable costs per unit. If the number of units at a given level of output are multiplied with variable cost per unit, we get the variable proportion in the total amount of expenses at the given level. The difference between the two amounts gives us the Fixed Cost component in the semi variable cost.

Contribution: Contribution is the difference between sales and Variable Costs. Since sales & Variable Cost can be both be expressed in P.U. terms, contribution is usually expressed in P.U. terms. Contribution = Sales Variable Cost Contribution P.U. = Selling Price P.U.= Selling Price P.U. Variable Cost P.U. Total contribution = Contribution P.U. X No. of Units. Total Sales Total Variable Cost. P/v Ratio: P/v Ratio stands for Profit /Volume Ratio. However, it is ratio of contribution to sales. (The term Profit is used as fixed costs are not considered in Marginal Costing technique & profit is same as Contribution). = P/v Ratio = Contribution / Sales; Sales-Variable Costs/ Sales; 1-V.C/Sales; Change in Profit(Contribution)/Change in Sales; BEP ( Break Even Point ): BEP= Fixed Cost / P/V Ratio; In Units : Fixed Cost / Contribution P.U; Fixed costs / Selling Price P.U. Variable Cost P.U; BEP (Sales in Volume) BEP in Units X Selling Price P.U = Fixed Cost X Total Sales / Total Sales Total Variable Cost. Units for Desired Profit = Fixed Cost + Desired Profit/ Contribution P.U. Sales for Desired Profit = Fixed Cost / Desired Profit / P/v Ratio. Margin of Safety (MOS) = Total Sales BEP Sales