MARGINAL COSTING

INTRODUCTION
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Marginal costing is not a system of cost ascertainment but a special technique to deal with the effects of cost or profits, of changes in the volume or range of output and sales. It is the addition to the total cost due to the production of one more unit of the production.

Definition of Marginal Costing

According to J. Batty, Marginal Costing is a technique of cost accounting which pays attention to the behavior of costs with changes in the volume of output.
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For Example: if n units are produced at a cost of Rs. 50000 & n+1 units at a cost of Rs. 50050, then the marginal cost of an additional unit is Rs. 50. if output of n-1 units goes down to Rs. 49960, again The marginal cost will be Rs.40.

Steps involved in Marginal Costing

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Differentiation between fixed costs and variable costs. Ascertainment of marginal costs; and Ascertainment the effect on profit due to changes in volume or type of output, i.e.; the determination of cost-volume-profit relationship.

Statement of Profitability
PARTICULARS (A) SALES Direct Material Direct Wages Variable Overheads (B) MARGINAL COST Contribution (A) (B) Less: NET PROFIT Fixed Overheads Cost per unit Total (Rs.)

Tools or Techniques of Marginal Costing

Contribution Profit / Volume Ratio Break Even Point Margin of Safety

I. CONTRIBUTION

Contribution = Sales Variable Cost OR

Contribution = Fixed Costs Profit / Loss

II. PROFIT / VOLUME RATIO (P/V)

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It is also known as Contribution / Sales Ratio (C/S Ratio). P/V Ratio = Contribution / Sales * 100
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P/V Ratio = (Sales VC) / Sales * 100

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P/V Ratio = Change in Profits / Change in Sales * 100

III. BREAK EVEN POINT

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Break Even Point (in units) = Total Fixed Cost Contribution per unit or = Total Fixed Cost Selling Price per unit Variable Cost per unit

III. BREAK EVEN POINT

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Break Even Point (in rupees) = Total Fixed Cost Selling Price per unit Contribution per unit = Total Fixed Cost Total Sales Total Contribution = Total Fixed Cost P / V Ratio

III. BREAK EVEN POINT

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Sales required to earn desired profits (in units) = Total Fixed Cost + Desired Profits Contribution per unit

Sales required to earn desired profits (in sales) = Total Fixed Cost + Desired Profits P / V Ratio

IV. MARGIN OF SAFETY

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Margin of Safety = Actual Sales (or Budgeted Sales) Sales at Break even Point or = Profit P / V Ratio

Advantages of Marginal Costing

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Fixation of Selling Price. Effective Cost Control. Helpful in Production Planning. Helpful in Budgetary Control. Helpful in Make or Buy Decisions. Determination of Tender or Quotation Price. Most important :: It provides assistance to management in taking a number of effective business decisions.

Disadvantages of Marginal Costing

Difficulty in the fixation of Selling Price. Difficulty to analyze overhead. Complete or full information not given. Over importance to selling function.