
Discuss Marginal Costing within the Financial Management ( FM ) forums, part of the Resolve Your Query  Get Help and discuss Projects category; Marginal Costing & Decision Support System Nature and Scope of Marginal Costing Marginal Costing is the technique of segregating fixed ...
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Marginal Costing 
Marginal Costing 
September 8th, 2010
Marginal Costing & Decision Support System Nature and Scope of Marginal Costing Marginal Costing is the technique of segregating fixed and variable costs and thereafter arriving at the cost which would vary in proportion to the volume of production or sales. Experts defines the Marginal Costing as “The amount at any given volume of output by which aggregate cost is change, if the volume of the output is increased or decreased by one unit.” For Example: If the Cost Of production of 10,000 Units = Rs. 1,00,000 And for 10,001 Units = Rs. 1,00,008 Then Rs.8 is the Marginal Cost of 1 additional unit. If the increase in output is more than one, the total increase in cost divided by the total increase in output will give the average marginal cost per unit. Nature and Scope of Marginal Costing For Ex: If the Cost Of production of 10,000 Units = Rs. 1,00,000 And for 10,020 Units = Rs. 1,00,100 Then Rs.5 is the Marginal Cost of 1 additional unit. Additional cost Rs.100 = Rs.5.00 Additional units 20 Marginal cost means the cost of the marginal or last unit produced. Marginal cost varies directly with the volume of production and marginal cost per unit remains the same. It Involves Following Fixed Cost = Rents, Taxes, Interest etc. Variable Cost = Direct Material, Direct Wages etc. Contribution = Fixed Cost + Profit Features Of Marginal Costing Cost Classification Inventory Valuation Marginal Contribution Marginal Cost Statement Illustration :  Sales = Rs. 2,00,000 Fixed Cost = Rs.80,000 Variable Cost = Rs. 40,000 Then Profit will be… Sales 2,00,000 Less Variable Cost 40,000 Contribution 1,60,000 Less Fixed Cost 80,000 = Profit 80,000 Distinguish between Fixed and Variable cost Profit/Volume Ratio Popularly known as the P/V ratio expenses, the relation of contribution to sales and Marginal Income ratio. Symbolically, P/V Ratio = Contribution *100 Sales As long as unit selling price & unit variable cost remain constant, P/V ratio can as be found out by expressing change in contribution in relation to the change in sales. Lets say Contribution = Rs 100 Sales = Rs 500 P/V Ratio = 100 * 100 = 20% 500 BreakEven Analysis Problems On Marginal Costing Illustration Profit Volume ratio of a company is 50%, while its margin of safety is 40%. sales volume of the company is Rs. 50 lakhs, find out its breakeven point and net profit. Solution Rs. Sales 50,00,000 Less: Margin of Safety (40% of Rs. 50,00,000) 20,00,000 Breakeven Sales Rs.30,00,000 Margin of Safety = Profit P/V ratio Rs. 20,00,000 = Profit 50% Rs. 20,00,000 x 50% = Profit Profit = Rs. 10,00,000 Alternatively, Break even Sales = Fixed Cost P/V ratio Rs. 30,00,000 = Fixed Cost 50% Rs. 30,00,000 x 50% = Fixed Cost Fixed Cost = Rs. 15,00,000 Profit= Contribution – Fixed Cost = Rs. 25,00,000 – 15,00,000 = Rs. 10,00,000 Application of Marginal Costing Diversification Of Products :  Introduction of new product In Market with Existing product of the same company. So company wants to know the profitability of the new product in market. Illustration – Product (X) Sales:  50,000 Direct Material – 20,000 Direct Labour – 10,000 Variable Cost – 5,000 Fixed OV – 10,000 In New Product following cost increase as follows :  Product (Z) Sales:  10,0000 Direct Material –4,800 Direct Labour – 2,200 Variable Cost – 1,400 Company wants to know whether Product Z will be profitable or not ? Solution: Application of Marginal Costing Fixation of Selling Prices :  Important function in Modern Business Management. Price Under normal circumstances for long period should be preferably based on total cost. It can be based on the Marginal Cost if the high profit Margins is added to marginal cost to contribute towards fixed cost and profits. When MC Tech use for Pricing the principle is that price should be marginal cost + certain amount. (Amount Depend on various Factors) If Price = Marginal Cost, the Amount of Loss will be = Total Fixed Cost The figure of Loss will be the same, or even lower if production discontinues. Therefore SP should be slightly Higher than Marginal Cost in Short period Application of Marginal Costing Selection of profitable Product Mix :  Suitable Product Mix will denote the ratios in which the various products are produced and sold. In absence of limiting factor, contribution under each mix is considered, the mix will give highest Contribution will be profitable. So long the fixed cost remains the constant the profitable sales mix is determined on the basis of contribution only. If FC changes, the product mix is associated with the change in fixed cost. The relatively profitability of Mix will have to be assessed on the basis of Net Profit and not on Contribution Basis. Application of Marginal Costing Alternative Methods of Manufacture :  Whether One Machine to be employed or another for the same production. The method of manufacture that will give the largest contribution is to be selected. Illustration :  Product A can be produced on Machine X or Machine Y Machine X gives 10 units ph. & Machine Y gives 20 units ph Total Machine Hours available  3000 Hrs Solution:  Application of Marginal Costing Make or Buy Decision:  A Company may have unused capacity which may utilised for making component parts or similar item instead of buying them from market. In this decision MC should be compared with outside price. If MC < Purchase it is profitable to Manufacture product in factory. Fixed cost are excluded in this process. If Fixed cost it is necessary to include in cost. Under such situation knowing Minimum Value is must to take a decision. That can be determined by:  Increase in Fixed Cost Contribution per unit Other Applications Cost Volume Profit Relationship Cost volume profit analysis is a simple but powerful tool for planning of profits and therefore of commercial operations. Marginal cost vary directly with volume of production or volume of output. Fixed cost remain unaltered regardless of the volume of output with in the scale of production fixed by the management. When cost behavior is related to sales, income shows the cost volume profit relationship The relationship can be expressed in graphs such as, breakeven charts or profit volume graphs or in various statement forms. Cost volume profit (C V P) is relevant to virtually all decision making areas particularly in short run. Advertisements
 
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Re: Marginal Costing 
Re: Marginal Costing 
June 25th, 2015
Meaning and Definition of Marginal Costing Marginal cost is the cost of the next unit or one additional unit of volume or output. To illustrate marginal cost let's assume that the total cost of producing 10,000 units is $50,000. If you produce a total of 10,001 units the total cost is $50,002. Advantage of Marginal Costing Cost control Shortterm profit planning Accurate overhead recovery rate Maximum return to the business Simplicity  
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