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MARGINAL

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;

 Fixed cost remain static & marginal costs are


completely variable at all levels of output.
 Selling prices are constant at all sales volume.
 Factor prices are constant at all sales volume .
 Efficiency and productivity remain unchanged. In a
multi product situation ,there is constant sales mix at
all level of sales.
 Turnover level is only relevant factor affecting cost &
revenue.
 Value of production is equal to volume of sales.
ELEMENTS-

 MARGINAL COST EQUATION


 CONTRIBUTION MARGIN .
 PROFIT /VOLUME RATIO .
 BREAK EVEN POINT .
 MARGIN OF SAFETY.
MARGINAL COST
EQUATION
• SALES=VARIABLE COSTS +FIXED
EXPENSES+P/L
OR
S-V=F+P/L
CONTRIBUTION MARGIN
• CONTRIBUTION =SELLING PRICE –MARGINAL
COST
OR
C=F+P/L
OR
C-F=P/L
PROFIT /VOLUME RATIO;
• P/V=CONTRIBUTION /SALES
OR
• F+P/L/V.C+F.C+P/L=[F+P/S]
OR
• S-V/S=CHANGE IN PROFITS OR
CONTRIBUTION/CHANGE IN SALES
BREAK EVEN POINT
• B.E.P=FC/P/V
OR
• TOTAL FIXED EXPENSES/S.P PER UNIT-MC PER
UNIT
OR
• TOTAL FIXED EXPENSES/CONTRIBUTION PER UNIT
VALUE OF SALES TO EARN
DESIRED AMOUNT OF
PROFIT
• SALES=F.C+D.P/P/V RATIO
MARGIN OF SAFETY ;

 MOS=PROFIT/P/V RATIO
DIFFERENCE BETWEEN
CONTRIBUTION &PROFIT

 Includes fixed cost &  Does not include fixed


profit . cost.
 Based on marginal cost  Based on common man
concept. concept.
 Contribution above  Profit is expected only
break even contributes after covering variable
to profit. and fixed cost.
 Contribution analysis  Profit does not require
requires a knowledge of any such concept.
break even concept.
APPLICATION OF MARGINAL COST
& COST, VOLUME & PROFIT
ANALYSIS-
 COST CONTROL.
 PROFIT PLANNING.
 EVALUTION OF PERFORMANCE.
 DECISION MAKING.
 FIXATION OF SELLING PRICE.
 KEY LIMITING FACTOR.
 SUITABLE PRODUCT MIX.
Thank You

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