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COSTING
Made By:- Manveer Singh
C204
Btech-Extc
What Is Marginal Costing?
• AMOUNT AT ANY GIVEN VOLUME OF OUTPUT BY WHICH
AGGREGATE COSTS ARE CHANGED IF VOLUME OF OUTPUT IS
INCREASED OR DECREASED BY ONE UNIT .IT RELATES TO
CHANGE IN OUTPUT IN PARTICULAR CIRCUMSTANCES UNDER
CONSIDERATION.
• MARGINAL COSTING IS THE ASCERTAINMENT OF MARGINAL
COST AND OF THE EFFECT ON PROFIT OF CHANGES IN VOLUME
OR TYPE OF OUTPUT BY DIFFERENTIATING FIXED COST
&VARIABLE COST .IN THIS TECHNIQUE OF COSTING ONLY
VARIABLE COST ARE CHARGED TO OPERATION ,PROCESSES OR
PRODUCTS LEAVING ALL INDIRECT COST TO BE WRITTEN OFF
AGAINST PROFITS IN PERIOD IN WHICH THEY ARISE
Difference Between Absorption costing
& Marginal costing
Only variable cost are included .fixed cost are recovered from contribution.
Marginal cost per unit will remain same at different levels of output because variable
expenses vary in the same proportion in which output varies.
Difference between sales and marginal cost is contribution and difference between
contribution and fixed cost is profit or loss.
Stock of work- in-progress and finished goods are valued at marginal cost which does not
include fixed cost .Fixed cost of a particular period is charged to that very period and is not
carried forward to next period by including in closing stock .Being so ,cost of a particular
period are not vitiated.
Only variable cost are charged to products .marginal cost technique does not lead to over or
under absorption of fixed overheads.
The technique of marginal costing is very helpful in taking managerial decisions because it
takes into consideration the additional cost involved only assuming fixed expenses
remaining constant.
Cost are classified according to the behaviour of cost i.e. fixed cost and variable cost.
Cost ,volume and profit relationship is an integral part of marginal cost studies as costs are
classified into fixed and variable costs.
Difference Between Absorption costing &
Marginal costing
All costs fixed &variable are included for ascertaining the cost.
Different unit costs are obtained at different levels of output because of fixed expenses
remaining same.
Difference between sales &total cost is profit.
A portion of fixed costs is carried forward to the next period because closing stock of
work -in -progress & finished goods is valued at cost of production which is inclusive
of fixed cost. In this way costs of a particular period are vitiated because fixed cost
being period cost should be charged to the period concerned & should not be carried
over to next period .
The apportionment of fixed expenses on an arbitrary basis given rise to over or under
absorption which ultimately makes the product cost inaccurate and unreliable.
Absorption costing is not very helpful in taking managerial decision such as whether to
accept the export order or not ,whether to buy or manufacture ,the minimum price to be
charged during depression etc.
Costs are classified according to functional basis such as production cost ,office and
administrative cost and selling and distribution cost.
Absorption costing fails to establish relationship of cost volume and profit as costs are
seldom classified into fixed &variable.
IMPORTANCE;
Fixed expenses are not allocated to cost units but are charged against ‘fund’
which arises out of excess of sales price over total variable costs.
LIMITATIONS;
Technical difficulties.
Time taken for completion of jobs is not given due attention.
Less effective.
Balance sheet will not exhibit true and fair view.
Problem of apportionment of variable cost still arises.
Difficulty to apply in contract or ship building industry.
Does not provide any standard.
General reduction in selling price and thus losses.
COST–VOLUME –PROFIT
ANALYSIS
Assumptions;
MOS=PROFIT/P/V RATIO
DIFFERENCE BETWEEN
CONTRIBUTION &PROFIT