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MARGINAL COSTING AS A TOOL FOR DECISION MAKING

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MARGINAL COST:-
“Marginal cost is the additional cost of producing an additional unit of product.”

MARGINAL COSTING:-
“In Marginal costing technique, only variable costs are charged as product costs and included in inventory valuation.”

MARGINAL COSTING HELPS IN DECISION MAKING:-
1.Fixation of Selling Price.
2.Exploring New markets.
3.Make or buy decisions.
4.Product mix
5.Operate plant or shut down.

CASE STUDY 1:-
MAKE OR BUY DECISION.

CASE STUDY 2:-
PRODUCT MIX.

Published in: Business
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MARGINAL COSTING AS A TOOL FOR DECISION MAKING

  1. 1. MARGINAL COSTING AS A TOOL FOR DECISION MAKING By :- SHUBHAM BONI 1
  2. 2. MARGINAL COST “Marginal cost is the additional cost of producing an additional unit of product.” 2
  3. 3. Example • A company manufactures 100 units of a product per month. The total fixed cost per month is Rs.5000 and marginal cost per unit is Rs.250. Case-1 (100 units) Variable cost 25,000 Fixed Cost 5,000 Total Cost 20000 Case-2 (101 units) Variable cost 25,250 Fixed Cost 5,000 Total Cost 20150 Additional cost=250 is the Marginal Cost 30,000 30,250 3
  4. 4. MARGINAL COSTING “In Marginal costing technique, only variable costs are charged as product costs and included in inventory valuation. 4
  5. 5. PERFORMA OF MARGINAL COSTING Particulars A B C Total Sales x x x x Less VC x x x x Contribution -- -- -- -- Fixed Cost x x x x Profit x x x x 5
  6. 6. MARGINAL COSTING HELPS IN DECISION MAKING • Fixation of Selling Price. • Exploring New markets. • Make or buy decisions. • Product mix • Operate plant or shut down. 6
  7. 7. Case Study 7
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  9. 9. 9
  10. 10. Case Study 1 (Make or buy) 10
  11. 11. • If the cost of making radio is Rs.6.25 each while cost of buying is Rs.5.75 each. Per unit Cost Rupees Materials 2.75 Labour 1.75 Other Variables 0.5 Fixed Cost 1.25 a) Should you make or buy? b) What would be your decision, if the supplier offered the component at Rs.4.85 each? 11
  12. 12. Case Study 2 (Product Mix) 12
  13. 13. a) 2,000 units of product A and C. b) 4,000 units of product B. c) 1,000 units of product A, 2,000 units of product B, 1,600 units of product C. Q:-)Which is the best Product mix? Cost per unit A B C Direct Material 20 16 40 Direct Wages 8 10 20 a) SP of A, B,C are 36,40,100. b) Variable Overheads of A,B,C are Rs.2,Rs.4,Rs.8. Fixed cost is 20,000 13
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