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# Marginal costing synopsis

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### Marginal costing synopsis

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