Marginal Costing and Profit Planning
Marginal Costing and Profit Planning
Marginal Costing
Marginal Costing is a technique where only the variable costs are considered while computing the cost of a product. The fixed costs are met against the total fund arising out of the excess of selling price over total variable cost. This figure is known as Contribution in marginal costing. Absorption Costing and Marginal Costing Incase of absorption costing, both fixed and variable overheads are charged to production, while in case of marginal costing, only variable overheads are charged to production and fixed overheads are transferred in full to the costing and profit and loss account. In case of absorption costing stocks of work-in-progress and finished goods are valued at works cost and total cost of production respectively. In case of marginal costing, only variable costs are considered while computing the value of work-in- progress or finished goods. Thus, closing stock in marginal costing is under valued as compared to absorption costing. 2
Scatter Graph Method : The data is plotted on a graph paper, with volume of production on the x-axis and the corresponding costs on the y- axis. A line of best fit is drawn, which is the total cost line. The point at which this line intersects the y-axis is taken to be the amount of fixed element. Method of Least Squares : This method is based on the mathematical technique of fitting an equation with the help of observations.
Fixation of Selling Price: The cost of the product and the desired profitability are two important factors which govern the fixation of selling price. Maintaining a desired level of profit: In the face of price cuts, in case the demand for the companys product is elastic, the minimum level of profit can be maintained by pushing up the sales. The volume of such sales can be found out by the marginal costing technique. Accepting of price less than total cost: Sometimes prices have to be fixed below the total cost of the product. In such a scenario, a price less than the total cost but above the marginal cost may be acceptable because in such periods any material contribution towards recovery of fixed costs is acceptable rather than no contribution at all.
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Decisions involving alternative choices: The technique of marginal costing helps in making decisions involving alternative choices ex. Discontinuance of a product line, changes of sales mix, make or buy, own or lease, exapand or contract etc. The technique used is differential costing, which is an extension of the technique of marginal costing.
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Summary
In this chapter you have studied : The concept of marginal costing Difference between Marginal costing and absorption costing, direct costing and differential costing Different methods of segregation of semi-variable costs Utility of CVP Analysis Types, advantages and limitations of break-even charts
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