Marginal Costing

MARGINAL COSTING-: Marginal costing is not a distinct method of costing like job costing or process costing. It is a technique which provides presentation of cost data in such a way that true cost-volume-profit relationship is revealed. VARIABLE COST-: It is the part of total cost, which changes directly in proportion with Total variable cost changes with change in volume of output. Increase in output will lead to increase in total variable cost and decrease in output will lead to reduction in total variable cost. However, variable cost per unit of production remains the same irrespective of increase or decrease in volume of production. Variable cost includes cost of direct material, direct labour, direct expenses, etc. FIXED COST-: It represents the cost which is incurred for a period, and which, within certain output and turnover limit tends to be unaffected by fluctuations in the levels of activity. Examples are rent, rates, insurance and executive salaries. BREAK-EVEN POINT-: It is a point at which a company makes neither profit nor loss. The marginal cost technique is based on the idea that difference of sales and variable cost of sales provides for a fund, which is referred as contribution. Contribution provides fixed cost and profit. CONTRIBUTION-: Marginal costing analysis depends a lot on the idea of contribution. In this technique efforts are directed to increase total contribution only. Contribution is a difference between sales and variable cost. PROFIT/VOLUME RATIO-: When the contribution from sales is expressed as a percentage of sales value, it is known as profit volume ratio. It expresses relation between contribution and sales. MARGIN OF SAFETY-: It represents difference between sales at a given activity and sales at break-even point. The margin of safety is measured in percentage of sales. Marof safety depends on level of fixed cost, rate of contribution and level of sales. MAIN FEATURES OF MARGINAL COSTING-: 1) costs are divided into two categories fixed cost and variable cost 2) Fixed cost is considered period cost and remains out of consideration for determination of product cost and value of inventories 3) Prices are determined reference to marginal cost and contribution margin 4) Priofitability of department and products is determined with reference to their contribution margin 5) In presentation of cost date, display of contribution assumes ominant role 6) Closing stock is valued on marginal costing. CRITICISM OF MARGINAL COSTING-: