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Marginal Cost Essay

8136 words - 33 pages

CHAPTER 26

Marginal Costing and Cost Volume Profit Analysis
Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product." Thus, the concept marginal cost indicates wherever there is a change in the volume of output, certainly there will be some change in the total cost. It is concerned with the changes in variable costs. Fixed cost is treated as a period cost and is transferred to Profit and ...view middle of the document...

It is a technique of cost ascertainment. Under this method both fixed and variable costs are charged to product or process or operation. Accordingly, the cost of the product is determined after considering both fixed and variable costs. Absorption Costing Vs Marginal Costing: The following are the important differences between Absorption Costing and Marginal Costing:
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Under Absorption Costing all fixed and variable costs are recovered from production while under Marginal Costing only variable costs are charged to production. Under Absorption Costing valuation of stock of work in progress and finished goods is done on the basis of total costs of both fixed cost and variable cost. While in Marginal Costing valuation of stOl!k of work in progress and finished goods at total variable cost only. Absorption Costing focuses its attention on long-term decision making while under Marginal Costing guidance for short-term decision making. Absorption Costing lays emphasis on production, operation or process while Marginal Costing focuses on selling and pricing aspects.

(2)

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Differential Costing Differential Costing is also termed as Relevant Costing or Incremental Analysis. Differential Costing is a technique useful for cost control and decision making. According to ICMA London differential costing "is a technique based on preparation of adhoc information in which only cost and income differences between two alternatives / courses of actions are taken into consideration." Marginal Costing and Differential Costing: The following are the differences between Marginal Costing and Differential Costing:
(1)

Differential Costing can be made in the case of both Absorption Costing as well as Marginal Costing While Marginal Costing excludes the entire fixed cost, some of the fixed costs may be taken into account as being relevant for the purpose of Differential Cost Analysis. Marginal Costing may be embodied in the accounting system whereas Differential Cost are worked separately as analysis statements. In Marginal costing, margin of contribution and contribution ratios are the main yardstick for the performance evaluation and for decision making. In Differential Cost Analysis. differential costs are compared with the incremental or decremental revenues as the case may be.

(2) (3) (4)

Advantages of Marginal Costing (or) Important Decision Making Areas of Marginal Costing The following are the important decision making areas where marginal costing technique is used : (I) Pricing decisions in special circumstances : (a) Pricing in periods of recession; (b) Use of differential selling prices.

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A Textbook of Financial Cost and Management Accounting,

(2) (3) (4) (5) (6) (7) (8) (9)

Acceptance of offer and submission of tenders. Make or buy decisions. Shutdown or continue decisions or alternative use of production facilities. Retain or replace a machine. Decisions as to whether to sell in the export market or in the home...

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