Cost and Management 2009 (Solved)

Marginal Costing
At any given level of output, additional output can normally be obtained at less than proportionate cost per unit. This is because the aggregate of certain items of cost will tend to remain fixed and only the aggregate of the remainder (variable Cost) will tend to rise proportionately with increase in output. Conversely, a decrease in the volume of output will normally be accompanied by a less than proportionate fall in the aggregate cost.
Therefore, costs should be analysed into variable and fixed components, for meaningful decision-taking. This theory, which recognizes the difference between variable and fixed costs, is called Marginal Costing.

It is technique of decision making, which involves:
(a) Ascertainment of total costs
(b) Classification of costs into
                (1) Fixed and (2) Variable
(c) Use of such information for analysis and decision making.

Thus, Marginal costing is defined as the ascertainment of marginal cost and of the ‘effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs. Marginal costing is mainly concerned with providing information to management to assist in decision making and to exercise control. Marginal costing is also known as ‘variable costing’ or ‘out of pocket costing’

1. Cost Classification: The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm.
2. Managerial Decisions: It is a technique of analysis and presentation of costs which help management in taking many managerial decisions such as make or buy decision, selling price decisions etc.
3. Inventory Valuation: Under marginal costing, inventory for profit measurement is valued at marginal cost only.
4. Price Determination: Prices are determined on the basis of marginal cost by adding contribution which is the excess of selling price over variable costs of sales.
5. Contribution: Marginal costing technique makes use of Contribution for taking various decisions. Contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments.

Assumptions of Marginal Costing:-
a)      All Elements of cost can be segregated into fixed and variable cost.
b)      Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuates directly in proportion to changes in the volume of output.
c)       The selling price remains unchanged at all levels of activity.
d)      Fixed costs remain unchanged for entire volume of production.
e)      The volume of production is the only factor which influences the costs.
f)       The state of technology process of production and quality of output will remain unchanged.
g)      There will be no significant change in the level of opening and closing inventory.
h)      The company manufactures a single product. In the case of a multi-product company, the sales-mix remains unchanged.
i)        Both revenue and cost functions are linear over the range of activity under considerations.