Marginal costing and its application

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ExpertsMind

This is a well known idea of economic theory. It may be explained as the change in total cost which arises as a result of a decrease and increase by one unit in volume of output. Marginal cost is an amount at any specified volume of output by which aggregate costs are changed if the volume of output is decreased and increased by single unit.

Marginal cost is identical with variable costs, prime costs plus variable overheads in the short run but, in a way, would also consist of fixed cost in the planning production activities over a long time frame connecting an increase in the productive capacity of business. Thus in decision making troubles, marginal costs are associated to change in output under particular circumstances of a case. Theoretically differential cost and marginal cost are the similar. If there is no modification in fixed cost then both these cost will be similar. Thus marginal cost does not consist of fixed cost at all whereas differential cost may comprise an element of fixed cost as well if fixed cost changes due to a decision. Marginal costing is a very significant method of decision making. It is a moderately new area in the field of accounting but it is slowly gaining more and more acceptance. It is the technique of matching cost with revenue to conclude periodic income. It is the ascertainment of marginal cost and of the effect on profit of changes on volume or sort of output by differentiating variable cost and fixed costs. In this situation it is to be noted that it is not a system of costing like procedure or job costing but it is just an approach to the presentation of accounting information meaningful to management. In this all cost are separate into variable and fixed components. Only the variable costs are observed as product cost and are used to value inventory and cost of goods sold. The fixed cost is treated as period cost and is charged straight to loss and profit account. Thus no part of fixed manufacturing cost is delayed to the next period as inventory. While preparing a profit and loss account on marginal costing basis, the variable or marginal cost of sales is deducted from sales value and the difference is termed as contribution margin. Marginal costing application in managerial decision making: The method of marginal costing is a precious aid to management in taking several policy decisions. Following are the few troubles where managerial costing analysis is useful: 1) pricing of products: product pricing is generally considered to be a hard problem, particularly in non-repetitive production. The troubles are to associate the supply and demand in such cases marginal costing is very helpful. This method can assist management in fixing prices in such circumstances: a) A trade depression in industry b) Dumping c) A seasonal fluctuations.

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Marginal costing and its application