Marginal Costing

Marginal costing

• Marginal costing is a technique for analyzing the changes of cost due to

changes of volume of production.
• The total cost of production is classified into fixed cost and variable cost.
• Only variable cost is changed to the production. Marginal costing is also
known as variable cost, direct cost and incremental cost
• It helps the management in pricing , assessment of profitability and decision
making.
 Definition

• Marginal costing is defined as the increase or decrease in total cost from

producing additional or fewer units from normal production.
 Characteristics of marginal costing

• All cost are classified into fixed and variable.

• The variable cost per unit remains constant. It varies according the change
of production.
• Fixed cost remains constant at all the level of production. But cost per unit
varies according to the production.
• The selling price per unit remains constant at all the level of activity.
 Advantages of marginal costing

• Simple and easy to understand

• It helps the management to take decision such as pricing, accepting orders and to
make or buy.
• It helps to fix the price for the product
• It helps to calculate BEP(Break Even point)
• It helps the management to control the cost.
• It helps to identify the profitability of different products manufacture in a company.
 Disadvantages of marginal costing

• The assumption that fixed cost remains constant may not be always correct.
• The assumption that the variable cost per unit remains constant is
practically not possible.
• The semi variable expenses not included in the analysis.
 Break Even Point
The study of cost volume relationship is called break even analysis
• BEP is a point where your total cost is equal to the total revenue.
• BEP is a point where no profit or no loss.
Profit =sales > total cost
Profit =sales < total cost
BEP =sales = total cost
 FIXED COST & VARIABLE COST

Fixed cost are the cost that are not directly related to production.
Ex: Rent , Salary.
Variable cost are the cost that varies according to the volume of production.
Ex: Raw Material , direct labour.
 Assumption of Break Even Point

• All the cost are classified into fixed and variable.

• Fixed cost remains constant at all the level of output.
• Variable cost proportionately vary with the volume of output.
• Selling price per unit remains constant.
• There is no changes in the operating efficiently.
• There is no changes in the price level.
• Suitable for only one product.
• Volume of sale & volume of production are equal.
 Advantage of BEP

• It explains the relationship between cost, production and volume of sales &
profit.
• Information provided by BEP can be easily understood.
• The chat discloses the profit at various level.
• It indicates the company to take necessary action to prevent the loss.
 Disadvantage of BEP
• It is suitable for one product at the time.
• It is difficult to classify the cost into variable or fixed.
• It is not suitable for long term planning.
• Fixed cost do not remain constant in the long run
• It ignores economics of scales.
• Semi variable cost are completely ignore.
 Cost volume profit analysis:

• This is the analysis used for studying the relationship between cost, volume &
profit. Profit maximization is the main objective of all the business.
• Profit helps to measure the competency and efficiency of management. Hence all
these factor influence the factor.
Factor:
Price of the product
Volume of sales
Cost of product
 Example of CVP

• Profit depends on sales, volume of sales depends on volume of production,

volume of production depends on cost of production.
how much sales should be made to avoid loss.
how much sales should be made to earn a desired profit.
which product is more profitable whether to make or buy a component.