This website uses cookies to ensure you have the best experience. Learn more

Marginal Costing Essay

1496 words - 6 pages

Marginal Costing
Dr. Shubhra

Product Costing
There are mainly two techniques of product costing and income determinationAbsorption Costing: This is a total cost technique under which total cost (i.e., fixed cost as well as
variable cost) is charged as production cost. In other words, in absorption costing, all manufacturing
costs are absorbed in the cost of the products produced.

Marginal Costing: An alternative to absorption costing is marginal costing, also known as ‘variable
costing’ or direct costing. Under this technique, only variable costs are charged as product costs and
included in inventory valuation. Fixed manufacturing costs are not allotted to products but are
...view middle of the document...

Pricing
Marginal costing and
profit

• In marginal costing, prices are based on marginal cost plus contribution.
• In this, profit is calculated by a two-stage approach. First all, contribution is
determined for each product or department which are pooled together called
‘Fund’. Then from this fund is deducted the total fixed cost to arrive at a profit or
loss.

Absorption Costing Vs Marginal Costing
Treatment of
fixed and
variable costs

• In marginal costing, only variable costs are charged to products. Fixed costs are treated as
period costs and charged to Profit and Loss Account of the period. In absorption
costing, all costs (both fixed and variable) are charged to the product.

Valuation of
stock

• In marginal costing, stock of work-in-progress and finished goods are valued at
marginal cost only. In absorption costing, stocks are valued at total cost which includes
both fixed and variable costs. Thus stock values in marginal costs are lower than
that in absorption costing.

Measurement
of
profitability

• In marginal costing, relative profitability of products or departments is based on a study
of relative contribution made by respective products or departments. The managerial
decisions are thus guided by contribution. In absorption costing, relative profitability is
judged by profit figures which is also a guiding factor for managerial decisions.

Income Statement (Absorption Costing)

Income Statement ( Marginal Costing)

Difference in Profit Due to Difference in Costing
Method
Profit under the two systems is different because of difference in stock valuation.
Production is equal to sales

Production is more than sales:

Production is less than sales

• (i) When there are no opening
and closing stock, profit/loss
under absorption and marginal
costing systems are equal.
• (ii) When opening stock is equal to
closing stocks then also profit/loss
under the two systems will be equal
provided the fixed cost element in
opening and closing stocks is the
same amount.

• When production during a period
is more than sales, i.e., when
closing stock is more than opening
stock, the profit as per
absorption costing will be more
than that shown by marginal
costing. This is because in
absorption costing a part of fixed
overheads included in closing stock
value is carried forward to next
accounting period in the form of
closing stock.

• When production during a period
is less than sales, i.e., when opening
stock is more than closing stock,
profit shown by marginal costing
will be more than that shown by
absorption costing. This is because
under absorption costing, cost of
goods sold is higher because a part
of fixed cost from the preceding
period is added to the current
year’s cost of goods sold in the
form of opening stock.

Cost-Volume- Profit Analysis
Cost-volume-profit analysis (CVP analysis) is an extension of the principles of marginal costing. It...

Other Papers Like Marginal Costing

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

Abc System Essay

965 words - 4 pages the costs of other cost objects. The use of an ABC system can also assist a company to establish ways to analyze and justify manufacturing cycle-time improvements. Advantages of an Activity Based Costing System  The most obvious advantage is the accuracy in cost calculation with regards to the production line which streamlines the flow of the product from the producer to the end user by using unitary cost, or marginal cost as the computation

Cost Accounting

1183 words - 5 pages ) b) What is the marginal cost per unit? (1 marks) c) Calculate the contribution margin per unit? (2 marks) d) Profit statement using Marginal Costing techniques. ( 4 marks) e) Profit statement using Absorption Costing techniques. ( 4 marks) f) Reconcile the difference between the profit numbers calculated above. (2 marks) g) Outline two reasons why Absorption Costing is recommended over Marginal Costing by accounting bodies

Accounting

967 words - 4 pages in 2012 and 2013. (3 marks) b) Compute production cost per unit under absorption costing and marginal costing. (4 marks) c) Compute the operating income for year 2013 if only 4,000 units sold at a selling price of RM45 per unit using the both methods. (11 marks) d) Explain the income difference between the two costing methods. (4 marks) 3/5 MAS 3023/FPPP/SEMESTER II SESSION 2013/14 QUESTION 3 (28 Marks :50 Minutes) Teras Berhad

Market Economics

3057 words - 13 pages products. In other words all costs are absorbed into production without any distinction about whether they are variable (avoidable) or fixed in nature • Marginal Costing: sometimes referred to as ‘variable’ or ‘direct’ costing is a systems of costing where only the variable (direct) costs of production are charged to cost the production. Thus in Marginal Costing fixed costs are not treated as ‘Product costs’ but as ‘Period Costs’ and are

Management Accounting

1153 words - 5 pages variable costing and the use of a marginal approach to costing. Fixed overhead costs are not taken into account when evaluating the options in making short term decisions. The alternative to marginal costing is absorption costing. This approach attempts to allocate all costs, both fixed and variable, to individual units of production. The problem with absorption costing is that it makes use of arbitrary allocations of overhead costs to products

Termpaper

2683 words - 11 pages anticipated profit for the year of £0.40m. This first case study focuses on the concept of standard costing, variance analysis and the reconciliation of budget to actual profit through an analysis of the main cost variances. The scenario assumes that you work as an assistant in the SME business services unit of Dunn and Musgrave a firm of accountants and consultants. You have recently introduced, at Coverdrive Ltd a system of standard

How Auto Manufacturers Should Choose Among Substitutable Inputs and Production Process

3180 words - 13 pages also shows that the total cost increases at a decreasing rate between point 0 (the origin) and Q1 where marginal cost curve is at a minimum as discussed below. Marginal cost is defined as the change in total costs associated with a one-unit change in output. Average cost, finally, is defined as the total cost divided by total output. Again, typical marginal and average cost curves are depicted in Figure 5.8 of our textbook by Brickley, Smith and

A New House Readyness

890 words - 4 pages that is down. If you don’t have good credit your rates may be even higher so again really paying attention and balancing your rate with your income will be the best way to take advantage of buying a home when it is a buyers market for home purchases. 3. Explain how that influences the marginal benefits and marginal costs associated with the decision to purchasing a house. * According to our reading material (Ch. 1) (p. 7) “A rational

Segmentation and Target Market Paper

728 words - 3 pages direct costing or marginal costing. To complete this summary comparison of absorption and variable costing, we need to consider briefly the handling of selling and administrative expenses. (Accountting4management.com) Basically, it allows a business to adjust cost of a product based on what it takes to get the item to the customer. Changing the cost system was the smartest thing this company did since they opened in my opinion. Since they have a

Cost Accounting Case Study

2627 words - 11 pages , we’ll see instances of how Raymond has used Marginal Costing to its gain. Note: The figures used in the cost sheets below are representative of the actual figures provided by the company in their Annual Report 2004. 2. Applications 2.1. FLUCTUATIONS IN RAW MATERIAL PRICES In 2002-2003, the management forecasted an increase in the cotton prices. An increase in the raw material prices would adversely affect the profit margin. This increase in

Related Essays

Marginal Costing Essay

1150 words - 5 pages Dr K.V.Rao** MARGINAL COSTING Introduction: 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

Management Accounting Essay

616 words - 3 pages Marginal costing and Absorption costing: the concept of marginal and absorption costing and its practical applications on business decisions. Cost Volume Profit Analysis: Relationship, impact on pricing, practical decision making strategies through CVP analysis Standard Costing and Variance analysis: concept and objectives of standard costing, advantages and limitations, variance analysis (Material, labour, overheads and sales variance

Management Accounting Essay

1855 words - 8 pages streamline the process of maintaining an ABC system and simplifying its association with regular cost accounting details may complicate the employees of AMM Electronics (Accounting Explanation, 2011). Swedish Enterprise, a small manufacturing company is currently working on improving the profits of the company. Therefore, it uses the marginal costing method to monitor the operations. Swedish Enterprise uses fixed overhead as a whole rather

Absorption Vs Variable Costing Essay

4202 words - 17 pages variable overhead. Image 1.4 As mentioned, the absorption costing is referred to as full costing while, the variable costing is referred to as a direct costing or marginal costing (1). The variable costing is not accepted by the GAAP for external reporting purposes because of the way it expenses the fixed costs. Also, it is not used for tax reporting because it can report lower taxes as inventory increases. Even though the use of variable