MARGINAL COSTING

 MARGINAL COSTING

DEFINITION & MEANING OF MARGINAL COSTING

Definition : Marginal Costing is defined as the amount at any given volume of output by which aggregate costs can be changed if the volume of output is increased or decreased by one unit.

 Meaning : Marginal Costing is the technique of controlling by bringing out the relationship between profit & volume.

Classification into fixed cost and variable cost

Determination of Price

Characteristics of Marginal Costing

- Profitability

- Valuation of stock

- Simplicity

- Stock Valuation

- Meaningful Reporting

 Fixed cost also called indirect or supplementary cost.

 Variable cost also called direct or prime cost

 Mixed cost= fixed cost + variable cost

 Segregation of cost means to separate fixed cost & variable cost.

 Marginal cost is the amount of cost at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by 1 unit.

 Marginal cost- only variable cost

 In marginal costing only variable cost are considered in calculating the cost of product while fixed cost are treated as period cost which will be charged against revenue of profit.

 Contribution= selling price – variable cost

 Selling price= contribution + variable cost

 Profit= contribution – fixed cost

 In marginal method we take only variable cost but in absorption method we take both fixed cost and variable cost.

 In absorption costing both fixed & variable overheads are charged to production while in marginal costing only variable costs are charged. Thus under absorption costing there will be either over absorption or under absorption of fixed overhead. Whereas in marginal costing the actual amount of fixed overheads is wholly charged to contribution.

 Profit volume ratio= contribution/sales, PV ratio depicts the soundness of a firm.

 Pv ratio can be improved by improving contribution & contribution can be improved by increasing sales, decreasing variable cost, putting more effort on those products which have higher ratio.

 Break even analysis- no profit no loss

 BEP units= Fixed cost/contribution per unit

 BEP Rs = Fixed cost/ PV ratio

 Valuation of stock in marginal costing is higher.

 MOS (Margin of safety) = total sales- BEP (SALES)

ADVANTAGES OF MARGINAL COSTING

Effect of Fixed Costs

Profit Planning

Cost Control

Pricing Policy

Helpful to Management