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Marginal Costing: Concepts & Applications

Marginal costing is a technique that differentiates between fixed and variable costs. It involves ascertaining marginal costs and determining the effect of changes in output volume or product mix on profits. Only variable or marginal costs are considered in calculating product costs. Marginal costing helps with pricing decisions, product mix optimization, and other managerial decisions. It provides a simplified approach to overhead allocation and facilitates cost control and profit planning.

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166 views13 pages

Marginal Costing: Concepts & Applications

Marginal costing is a technique that differentiates between fixed and variable costs. It involves ascertaining marginal costs and determining the effect of changes in output volume or product mix on profits. Only variable or marginal costs are considered in calculating product costs. Marginal costing helps with pricing decisions, product mix optimization, and other managerial decisions. It provides a simplified approach to overhead allocation and facilitates cost control and profit planning.

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Book worm
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MARGINAL

COSTING

Subject :
Submitted to Prof :
MMS SEMESTER-2;DIV-B
GROUP MEMBERS
Name Roll No

Abhinav Jain 67

Priyank jaywant 68

Seema Kalro 69

Nikita Khandol 70

Sagar Malage 71

Tanaya Mengle 72
MARGINAL COST
The ICMA has defined Marginal cost as the
amount at any given volume of output by
which aggregate costs are changed if the
volume of output is increased or decreased
by one unit .

This increase or decrease in variable cost


from existing level to new level is called as
marginal cost.
DEFINITION OF MARGINAL
COSTING
Marginal costing means : the ascertainment
of marginal costs and of the effect on profit
of changes in volume or type of output by
differentiating between fixed and variable
costs.
FEATURES
Cost volume profit relationship is an integral
part of marginal costing.
Only the variable or marginal cost is
considered while calculating product costs.
Profitability of various products is determined
in terms of marginal contribution.
It is a technique of cost recording and cost
reporting.
Contribution is based on sales plus marginal
cost.
Prices are based on marginal cost plus
contribution.
MARGINAL COST EQUATION
S - V =F + P
i.e. C (CONTRIBUTION)= F + P
where :
S=Sales

V=Variable cost

F=Fixed cost

P=Profit
APPLICATION OF MARGINAL COSTING
Diversification of products
Pricing decisions

Acceptance of additional

orders,exporting,exploring new markets etc.


Selection of optimal product mix

Alternative use of production facilities

Make or buy decisions

Planning the level of activity

Deciding about closing down or suspending


activities.
PROBLEM
SOLUTION
ADVANTAGES
Constant in nature
Realistic

Simplified overhead treatment

Facilitates control

Meaningful reporting

Break even point

Aid to profit planning

Relative profitability
LIMITATIONS
Greater emphasis on sales
Improper basis for fixation of selling price

Less effective in capital intensive industry

Elimination of fixed cost

Useful only for short term assessment

Incomplete information

Elimination of fixed cost

Lack of standard for control


CONCLUSION

Marginal cost is equal to variable cost.


Marginal cost is concerned with determination of
product cost which consists of :
Direct material

Direct labor

Direct expenses

Variable overheads

Helps profit planning and budgeting.


CONCLUSION

Marginal costing is also known as :


Direct costing

Contributory costing

Incremental costing

No under/over absorption

Helps managerial decision making.

Marginal costing has wide applications

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