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.