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Notes by Prof. M. B. Thakoor           MARGINAL COSTING               SYNOPSIS(1) INTRODUCTION OF IMPORTANT TERMS      1) ...
Notes by Prof. M. B. Thakoor           Marginal Costing also known as Direct Costing or      Variable Costing. The word Ma...
Notes by Prof. M. B. ThakoorINTRODUCTION:“Marginal Cost” is derived from the word “Margin” and is wellknown concept of Eco...
Notes by Prof. M. B. ThakoorQ.4 What is Variable Cost?A.    Variable Cost is a cost which varies as per the level of      ...
Notes by Prof. M. B. Thakoor            TECHNIQUES OF COSTING      ABSORPTION COSTING            MARGINAL COSTING         ...
Notes by Prof. M. B. Thakoor  Sale                          xxx                     2. DATA PRESENTATION  Data is presente...
Notes by Prof. M. B. Thakoor  c) When Closing Stock is less than Opening Stock.  Profit will be less than Marginal Profit ...
Notes by Prof. M. B. Thakoor      RECONCILIATION OF RESULTS OF ABSORPTION            COSTING AND MARGINAL COSTINGWhen resu...
Notes by Prof. M. B. ThakoorProblems:Q.1:   Following cost data is given for a production of N & Co. Ltd.       Particular...
Notes by Prof. M. B. ThakoorQ.3:    The data below relate to Venus Ltd. Which makes and sell computerParticulars          ...
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  1. 1. Notes by Prof. M. B. Thakoor MARGINAL COSTING SYNOPSIS(1) INTRODUCTION OF IMPORTANT TERMS 1) Marginal Cost 3) Fixed Cost 2) Marginal Costing 4) Variable Cost 5) Semi Variable / Semi Fixed Cost(2) TECHNIQUES OF COSTING 1) Absorption Costing 2) Marginal Costing(3) CONCEPT OF BREAK EVEN POINT(4) CONCEPT OF PROFIT VOLUME RATIO(5) PRACTICAL APPLICATIONS OF MARGINAL COSTING TECHNIQUES 1) Pricing of Product 2) Make or buy decision 3) Operate or shutdown 4) Decision of Product Mix 5) Key or Limited Factor a) Labour Shortage b) Material Shortage c) Machine Capacity constraint (Capacity Utilisation)(6) PROFIT PLANNING(7) EXPANSION AND DIVERSIFICATION(8) ACCEPT REJECT SPECIAL OFFER AND SUBCONTRACTING.(1) Notes by Prof. M. B. Thakoor
  2. 2. Notes by Prof. M. B. Thakoor Marginal Costing also known as Direct Costing or Variable Costing. The word Marginal Costing is common in the U.K. and other Countries of the Continent, while the expression “Direct Costing” or “Variable Costing” is preferred in the U.S.A. “Marginal Cost” is derived from the word “Margin” and is well known concept of Economic theory. Thus quite in the Economic Connotation of the term, it is described in simple words as “the cost which arises from the production of additional increment of output and it does not arise in case the additional increments are not produced.” "The amount at given volume of output by which aggregate cost are changed if the volume of output is increased or decreased by one unit.” Marginal Costing is the ascertainment of Marginal Cost by differentiating the cost between fixed cost and variable cost and finding its effect on the profit of changes in volume or type of output. Marginal Costing necessitates Analysis of cost into fixed and variable. Even semi variable costs have to be closely and critically analysed into Fixed and variable.(2) Notes by Prof. M. B. Thakoor
  3. 3. Notes by Prof. M. B. ThakoorINTRODUCTION:“Marginal Cost” is derived from the word “Margin” and is wellknown concept of Economic theory. Thus quite in tune with theEconomic connotation of the term, it is described in simple wordsas “Cost which arises from the production of additional incrementof output and it does not arrive in case the additional incrementsare not produced.”Q.1 What is Marginal Cost?A. Marginal Cost is the amount at any given volume of output by which the aggregate cost change, if the output is increased as decreased by 1 unit.Q.2 What is Marginal Costing?A. Marginal Costing is a technique of costing which ascertains the effect of change in volume on the profits of the company, by dividing the cost into fixed and variable.Q.3 What is Fixed Cost?A. Fixed Cost is a cost which remains fixed irrespective of the level of production. Fixed Cost remain fix in total but changes per unit.(3) Notes by Prof. M. B. Thakoor
  4. 4. Notes by Prof. M. B. ThakoorQ.4 What is Variable Cost?A. Variable Cost is a cost which varies as per the level of production. Variable Cost remain fixed per unit but it varies in total.Q.5 What is Semi-Fixed / Semi-Variable Cost?A. Semi-Fixed / Semi-Variable Cost are basically fixed cost upto a certain level of activity specified and they vary after certain level. Ex. Maintenance expenditure to a certain level is fixed if production do not fluctuate widely. And if production rises beyond a fixed limit additional maintenance expenditure is required though such additional expense may not vary directly with production. Eg. Telephone Expenses.Q.6 What is the basic theme of Marginal Costing ?A. The concept of Marginal Costing is based on the important distinction between product cost which is related to volume of production and period cost which is related to period of time and not volume of production. This it is based on making a distinction of cost into variable and fixed.(4) Notes by Prof. M. B. Thakoor
  5. 5. Notes by Prof. M. B. Thakoor TECHNIQUES OF COSTING ABSORPTION COSTING MARGINAL COSTING 1. FORMAT OF STATEMENT Cost Statement / Cost Sheet Marginal Cost Statement for the year ended Raw Material Cost xxx Sales Revenue xxx Add: Direct Labour Less: Variable Cost of Goods Sold Add: Direct Expenses xxx 1. Direct Mat. xxx PRIME COST xxx 2. Direct labour xxx Add: Works Overhead xxx 3.Direct Expenses xxx GROSS WORKS COST xxx 4. Variable Fy. OH (if any) xxx Add: Opening W.I.P. xxx 5. Variable Admn. OH (if any) xxx xxx 6.Variable S/D. OH xxx xxx Less: Closing W.I.P. xxx CONTRIBUTION xxx xxx Less: Fixed Cost Less: Sale of Scrap xxx 1. Factory OH. xxx NET WORKS COST xxx 2.Office & Admn. xxx Add: Office & Admn. 3. Selling & Dis.OH xxx xxx a) Fixed expenses xxx PROFIT xxx b) Variable expenses xxx xxx COST OF PRODUCTION xxx Add: Op. Stock of F.G. xxx xxx Less: Closing Stock of F.G. xxx COST OF GOODS SOLD xxx Add: Selling & Distn. a) Fixed Exp. xxx b) Variable Exp. xxx xxx COST OF SALE xxx Add : PROFIT xxx(5) Notes by Prof. M. B. Thakoor
  6. 6. Notes by Prof. M. B. Thakoor Sale xxx 2. DATA PRESENTATION Data is presented in the form of Data is presented in the form Vertical Statement. One of them of vertical statement known being Cost Sheet where Net as Marginal Cost Statement Profit of each product is where the cost data presented determined after subtracting highlights the contribution of Fixed Cost along with the each product and the fixed Variable Cost. cost is deducted from the total contribution to get profit. The Simple principle used = Cost + Profit = Selling price The Simple principal used = Sales – Cost = Profit. 3. TYPE OF COST Both Fixed and Variable Cost are Only Variable Costs are considered to find the cost of the considered for finding the product. Marginal Cost. 4. INVENTORY VALUATION Under Absorption Costing Under Marginal Costing Inventory is valued at Factory inventory is valued at Cost which include factory Variable Cost and no part of overheads both Fixed and Fixed Cost is applied to the Variable. A part of production inventory. overhead is therefore carried to the next accounting period along with W.I.P. and finished goods. 5.IMPACT OF INVENTORY VALUATION ON PROFIT a) No opening and no closing stock i.e. Production = Sale Profit is same as Marginal Profit is same as absorption Costing. Costing b) When Closing Stock is more than Opening Stock. Profit will be more than Marginal Profit will be less than Costing Absorption Costing. Logic: Because Under Absorption Costing a portion of fixed cost is charged to the closing stock and the same is deducted from cost so cost decreases hence profit increases.(6) Notes by Prof. M. B. Thakoor
  7. 7. Notes by Prof. M. B. Thakoor c) When Closing Stock is less than Opening Stock. Profit will be less than Marginal Profit will be more than Costing Absorption Costing. Logic: Under Absorption Costing a portion of fixed cost is charged to opening stock which is added to cost and its impact is greater than closing stock. So cost increases and profit decreases of the Business organizations. 6. AID IN DECISION MAKING As both Fixed are variable cost As it classify cost as per are considered and it do not variability it do help in decision recognize the difference making considering the between Fixed Cost and Relevance of certain cost and Variable Cost it do elaborately irrelevance of certain cost. explain past profit / losses but do not help when it comes to tomorrows result. It considers all cost are Releyant Cost.Process of Marginal CostingFirst find the difference between sale and variable cost i.e. Excessof sale over variable cost and this difference is known ascontribution. The excess of contribution over Fixed Cost if profit.The emphasis is on increasing the total contribution.Sales – Variable Cost = ContributionContribution – Fixed Cost = Profit(7) Notes by Prof. M. B. Thakoor
  8. 8. Notes by Prof. M. B. Thakoor RECONCILIATION OF RESULTS OF ABSORPTION COSTING AND MARGINAL COSTINGWhen results of Absorption Costing and Marginal Costing arecompared it is necessary to make adjustments for under absorbedoverhead and / or over Absorbed overheads.Because under absorption costing fixed overhead rate ispredetermined based on normal level of activity.When actual activity level is different from normal activity level, asituation of under absorption or over absorption of fixed costarises.(1) Under Absorbed = Normal Prod. – Actual Prod X Fixed Overhead Fixed Overhead Level Level rate per unitThe above amount is reduced from profit under AbsorptionCosting or the above amount is added to the cost under AbsorptionCosting before comparing profit with Marginal Costing.(2) Over Absorbed = Actual Prod. – Normal Prod X Fixed Overhead Fixed Overhead Level Level rate per unitThe above amount is added to profit under Absorption Costing orthe above amount is deducted from the cost of production underabsorption costing before comparing profit with Marginal Costing.(8) Notes by Prof. M. B. Thakoor
  9. 9. Notes by Prof. M. B. ThakoorProblems:Q.1: Following cost data is given for a production of N & Co. Ltd. Particulars Per Unit (Rs.) Sale Price 10 Variable Cost 6 Fixed Cost 2 Normal Production 26,000 units Following additional data are given for the four consecutive periods. Particulars Period I Period II Period III Period IV (Units) (Units) (Units) (Units)Opening Stock - - 6,000 2,000Production 26,000 30,000 24,000 30,000Sales 26,000 24,000 28,000 32,000Closing Stock 6,000 2,000 -Prepare a statement showing the profit for different period under both Marginal CostingMethod and Absorption Costing Method.Q.2: Sale Price Rs. 5.00 per unit Variable Cost Rs. 3.00 per unit Fixed Cost Rs. 1.00 per unit Normal Production 15,000 units Total Fixed Cost for the year Rs. 15,000Following statement shows the position of opening and closing stock. Particulars Period I (Units) Period II (Units)Opening Stock - 3,000Production 17,000 14,000Sale 14,000 16,000Closing Stock 3,000 1,000Prepare statement showing the figure of comparative profit by both the methods,Marginal Costing method and Absorption Costing Method.(9) Notes by Prof. M. B. Thakoor
  10. 10. Notes by Prof. M. B. ThakoorQ.3: The data below relate to Venus Ltd. Which makes and sell computerParticulars March AprilSales 5,000 Units 10,000 UnitsProduction 10,000 Units 5,000 UnitsSale Price per unit Rs. 100 Rs. 100Variable cost per unit Rs. 50 Rs. 50Fixed Production Overheads incurred Rs. 1,00,000 Rs. 1,00,000Fixed Production overheads cost per unit Rs. 10 Rs. 10being the predetermined overheadAbsorption rateAdministration, Selling and Distribution Rs. 50,000 Rs. 50,000Overheads (Fixed)You are required to prepare comparative profit statement for each month using(1) Absorption Costing(2) Marginal Costing(10) Notes by Prof. M. B. Thakoor

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