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Marginal costing
Marginal costing is a technique that differentiates between fixed and variable costs. It considers only variable costs for decision making purposes. Some key points: - Marginal cost is the cost of producing one additional unit of output and includes any additional variable costs. - Marginal costing focuses on contribution, which is the amount of sales remaining after deducting variable costs. Contribution helps cover fixed costs and determine profit. - Important ratios in marginal costing include contribution ratio, break-even point, and margin of safety. These ratios help management with decision making and performance evaluation. - While marginal costing is useful for short-term decisions, it has limitations such as the difficulty in segreg
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Marginal costing
- 1. MARGINAL COSTING Submitted by: Swikar K.Hemanth DeveshShukla Harshad chandrakanth Aparna.N INDIAN INSTITUTE OF PLANTATION MANAGEMENT
- 2. Marginal cost isthe change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. What is Marginal cost ??
- 3. Marginal cost– cost of producing an additional unit or output or service Marginal costing differentiates the fixed and variable costs Basics of marginal costing
- 4. Semi-variable costsare included in comparison of cost Only variable costs are considered Fixed costs are written off Prices are based on variable and marginal contribution Features Of Marginal Costing
- 5. Profit =Sales – Total cost Profit = Sales – (Variable cost + Fixed cost) Profit + Fixed cost = Sales – Variable cost Sales – Variable cost = Contribution = Fixed cost + Profit Contribution – Fixed cost = Profit Basic equation of Marginal Costing
- 6. It integrateswith other aspects of management accounting. Management can easily assign the costs to products. It emphasizes the significance of key factors. The impact of fixed costs on profits is emphasized. The profit for a period is not affected by changes in absorption of fixed expenses. There is a close relationship between variable costs and controllable costs classification. It assists in the provision of relevant costs for decision-making. Value Of Marginal Costing To Management
- 7. To segregatethe total cost into fixed and variable components is a difficult task Under marginal costing, the fixed costs are eliminated for the valuation of inventory , in spite of the fact that they might have been actually incurred. In the age of increased automation and technological development, the component of fixed costs in the overall cost structure may be sizeable. Marginal costing technique does not provide any standard for the evaluation of performance. Fixation of selling price on marginal cost basis may be useful for short term only. Marginal costing can be used for assessment of profitability only in the short run. Limitations Of Marginal Costing
- 8. Contribution =Sales – Variable Cost Contribution = Fixed Cost + Profit Contribution
- 9. This ratioindicates the contribution earned with respect to one rupee of sales. It is also known as Contribution Volume or Contribution sales ratio. Fixed costs remain unchanged in the short run, so if there is any change in profits, that is only due to change in contribution. Profit Volume (P/V) Ratio
- 10. This isa situation of no profit and no loss. It means that at this stage, contribution is just enough to cover the fixed costs, i.e. Contribution = Fixed cost Break-even Point (BEP)
- 11. These arethe sales beyond the break-even point. A business will like to have a high margin of safety because this is the amount of sales which generates profits. Margin of Safety = Sales – Break-even Sales Margin Of Safety
- 12.