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Marginal Costing Essay

1150 words - 5 pages

Dr K.V.Rao**
MARGINAL COST: Marginal Cost is the additional cost of producing an additional unit of product. In simple, marginal cost is the extra cost of an extra unit of production. It is the total of all variable costs. It composed of all direct costs and variable costs. The CIMA, London, defines marginal cost “as the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit”. In other words, it is the cost of one unit of product which would be avoided if that unit were not produced.
MARGINAL COSTING: It is ...view middle of the document...

9. Marginal costing technique is widely applied for large no.of short term managerial decision-making.

How far the marginal costing is useful in terms of cost control, can be summarized as follows :
1. Cost control through Evaluation of Performance : The evaluation of the performance of various departments or products can be evaluated with the help of marginal costing contribution analysis. This helps the management to focus on necessary cost contol.
2. Controlling costs as per Profit Planning : This marginal costing technique through the calculation of P/V Ratio helps the management to plan the activities in such a way that the profit can be maximised. Decline or increase in profits will be reflected on the efficiency of sales and production. This will straight away useful for controlling the costs towards planned profitl
3. Fixation of Selling Price : The technique of marginal costing assists the management to fix the price in such a way so that prices fixed can cover at least the variable cost.


4. Make or Buy decision analysis for cost control: Marginal cost analysis helps the management in making or buying decision. Control can be attained on costs with the system of budgets and their implementation. On going comparison of the costs as per budgets gives an appropriate timely control on costs.
5. Optimizing Product Mix : To maximise profits and increase sales volume it is necessary to decide an optimized mix or proportion in which various products of a company can be sold. This act of optimization of either sales or production results in a healthy cost control and give maximum profits.
6. Cost Control : Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs.
7. Flexible Budget preparation: As the marginal costing particularly classifies costs as fixed and variable costs which facilitates the preparation of flexible budgets and achieves cost control objective. 8. Decision-making , cost analysis and contol: Marginal costing in its principles adopts a separate treatment on fixed costs. Fixed costs are analysed as against contribution margin and written off to determine net profit. Therefore, cost control has become an integral part of marginal costing.
Format of Income Statement (Marginal Costing)
(A) Sales Variable manufacturing costs: Direct material consumed Direct labour Variable manufacturing overheadsCost of goods produced:Add: Opening stock of finished goods (Valued at variable cost of previous period)Less:...

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