Marginal Costing - Cost Management B Com Notes | EduRev

Cost Management

B Com : Marginal Costing - Cost Management B Com Notes | EduRev

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Marginal cost is the change in the total cost when the quantity produced is incremented by one. That is, it is the cost of producing one more unit of a good. For example, let us suppose:

Variable cost per unit = Rs 25
Fixed cost  = Rs 1,00,000
Cost of 10,000 units = 25 × 10,000 = Rs 2,50,000
Total Cost of 10,000 units = Fixed Cost + Variable Cost
= 1,00,000 + 2,50,000
= Rs 3,50,000
Total cost of 10,001 units = 1,00,000 + 2,50,025  = Rs 3,50,025
Marginal Cost  = 3,50,025 – 3,50,000
 = Rs 25

Need for Marginal Costing

Let us see why marginal costing is required:

  • Variable cost per unit remains constant; any increase or decrease in production changes the total cost of output.

  • Total fixed cost remains unchanged up to a certain level of production and does not vary with increase or decrease in production. It means the fixed cost remains constant in terms of total cost.

  • Fixed expenses exclude from the total cost in marginal costing technique and provide us the same cost per unit up to a certain level of production.

Features of Marginal Costing

Features of marginal costing are as follows:

  • Marginal costing is used to know the impact of variable cost on the volume of production or output.

  • Break-even analysis is an integral and important part of marginal costing.

  • Contribution of each product or department is a foundation to know the profitability of the product or department.

  • Addition of variable cost and profit to contribution is equal to selling price.

  • Marginal costing is the base of valuation of stock of finished product and work in progress.

  • Fixed cost is recovered from contribution and variable cost is charged to production.

  • Costs are classified on the basis of fixed and variable costs only. Semi-fixed prices are also converted either as fixed cost or as variable cost.

Advantages of Marginal Costing

The advantages of marginal costing are as follows:

  • Easy to operate and simple to understand.

  • Marginal costing is useful in profit planning; it is helpful to determine profitability at different level of production and sale.

  • It is useful in decision making about fixation of selling price, export decision and make or buy decision.

  • Break even analysis and P/V ratio are useful techniques of marginal costing.

  • Evaluation of different departments is possible through marginal costing.

  • By avoiding arbitrary allocation of fixed cost, it provides control over variable cost.

  • Fixed overhead recovery rate is easy.

  • Under marginal costing, valuation of inventory done at marginal cost. Therefore, it is not possible to carry forward illogical fixed overheads from one accounting period to the next period.

  • Since fixed cost is not controllable in short period, it helps to concentrate in control over variable cost.

 

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