Application of Marginal Costing Technique & Its Limitation

7/23/2019 Application of Marginal Costing Technique & Its Limitation

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PROJECT REPORT ON

APPLICATION OF MARGINAL COSTING TECHNIQUE AND

ITS LIMITATION

Submitted to

Unie!"it# o$ Mumb%i

In P%!ti%& Fu&$i&&ment O$ T'e Re(ui!ement

Fo!

M)Com *A++ount%n+#, Seme"te! -In t'e "ub.e+t

Co"t A++ountin/

0#

N%me o$ t'e "tudent 1 2 A.%# "%nto"' 3%ti&

Ro&& No) 1 2 45 26-77

N%me %nd %dd!e"" o$ t'e +o&&e/e

8) 9) Pend'%!:%! Co&&e/e

O$ A!t"; S+ien+e < Comme!+e

Dombi&i *E,; 5-4-=>

April 2015

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DECLARATION

I AJA? SANTOSH PATIL Roll No. 45 @ 6-77, the student of M.Com

(Accountancy) Semester I (2014), 8) 9) Pend'%!:%! Co&&e/e; Dombi&i;

Afflated to !n"ersty of Mum#a, here#y declare that the $ro%ect for the su#%ect

Strate&c Mana&ement of 'ro%ect re$ort on APPLICATION OF

MARGINAL COSTING TECHNIQUE AND ITS LIMITATION

su#mtted #y me to !n"ersty of Mum#a, for semester I eamnaton s #ased on

actual or* carred #y me.

I further state that ths or* s or&nal and not su#mtted anyhere else for any

eamnaton.

P&%+e 1Dombi&i

D%te1

Si/n%tu!e o$ t'e StudentN%me1 2 A.%# "%nto"' 3%ti&

Ro&& No12 4526-77

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AC8NOLEDGEMENT

It s a $leasure to than* all those ho made ths $ro%ect or* $oss#le.

I +han* the Alm&hty od for hs #lessn&s n com$letn& ths tas*. +he

successful com$leton of ths $ro%ect s $oss#le only due to su$$ort and

coo$eraton of my teachers, relat"es, frends and ell-shers. I ould

l*e to etend my sncere &rattude to all of them.

I am h&hly nde#ted to 'rnc$al A..Ranede ,Co-ordnator /maye

Sr, and my su#%ect teacher 'ra%a*ta armar*ar for ther encoura&ement,

&udance and su$$ort.

I also ta*e ths o$$ortunty to e$ress sense of &rattude to my $arents

for ther su$$ort and co-o$eraton n com$letn& ths $ro%ect.

nally I ould e$ress my &rattude to all those ho drectly and

ndrectly hel$ed me n com$letn& ths $ro%ect.

N%me o$ t'e "tudent

A.%# "%nto"' 3%ti&

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T%b&e o$ Content"

4

C'%3te! no To3i+ P%/e no

CHAPTER 1 Int!odu+tion

1.1 Introducton of cost accountn& and mar&nal

costn&.

CHAPTER 2 A33&i+%tion o$ m%!/in%& +o"tin/ 1

CHAPTER 3 Limit%tion 23

CHAPTER4 Con+&u"ion 24

0ib&io/!%3'#


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CHAPTER 1

INTRODUCTION OF COSTING

De$inition

Systemof com$utn&cost of $roductonor of runnn& a#usness, #y allocatn&e$endtureto "arous sta&esof$roductonor to dfferent o$eratonsof a frm.

Co"t A++ountin/

Cost accountn& s a $rocess of collectn&, analy3n&, summar3n& and e"aluatn&

"arous alternat"e courses of acton. Its &oal s to ad"se the mana&ement on the

most a$$ro$rate course of acton #ased on the cost effcency and ca$a#lty. Cost

accountn& $ro"des the detaled cost nformaton that mana&ement needs to

control current o$eratons and $lan for the future.

Snce mana&ers are ma*n& decsons only for ther on or&an3aton, there s no

need for the nformaton to #e com$ara#le to smlar nformaton from other

or&an3atons. Instead, nformaton must #e rele"ant for a $artcular en"ronment.

Cost accountn& nformaton s commonly used n fnancal accountn&

nformaton, #ut ts $rmary functon s for use #y mana&ers to facltate ma*n&

decsons.

!nl*e the accountn& systems that hel$ n the $re$araton of fnancal re$orts

$erodcally, the cost accountn& systems and re$orts are not su#%ect to rules and

standards l*e the enerally Acce$ted Accountn& 'rnc$les. As a result, there s

de "arety n the cost accountn& systems of the dfferent com$anes and

sometmes e"en n dfferent $arts of the same com$any or or&an3aton.

O!i/in"All ty$es of #usnesses, hether ser"ce, manufacturn& or tradn&, reure cost

accountn& to trac* ther act"tes. Cost accountn& has lon& #een used to hel$

mana&ers understand the costsof runnn& a #usness. Modern cost accountn&

or&nated durn& the ndustral re"oluton, hen the com$letes of runnn& a

lar&e scale #usness led to the de"elo$ment of systems for recordn& and trac*n&

costs to hel$ #usness oners and mana&ers ma*e decsons.

5
http://www.businessdictionary.com/definition/system.htmlhttp://www.businessdictionary.com/definition/computer.htmlhttp://www.businessdictionary.com/definition/cost-of-production.htmlhttp://www.businessdictionary.com/definition/business.htmlhttp://www.businessdictionary.com/definition/expenditure.htmlhttp://www.businessdictionary.com/definition/stages.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.businessdictionary.com/definition/operations.htmlhttp://en.wikipedia.org/wiki/Financial_accountinghttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principleshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Industrial_revolutionhttp://www.businessdictionary.com/definition/computer.htmlhttp://www.businessdictionary.com/definition/cost-of-production.htmlhttp://www.businessdictionary.com/definition/business.htmlhttp://www.businessdictionary.com/definition/expenditure.htmlhttp://www.businessdictionary.com/definition/stages.htmlhttp://www.businessdictionary.com/definition/production.htmlhttp://www.businessdictionary.com/definition/operations.htmlhttp://en.wikipedia.org/wiki/Financial_accountinghttp://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principleshttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Industrial_revolutionhttp://www.businessdictionary.com/definition/system.html


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In the early ndustral a&e, most of the costs ncurred #y a #usness ere hat

modern accountants call 5"ara#le costs5 #ecause they "ared drectly th the

amount of $roducton Money as s$ent on la#or, ra materals, $oer to run a

factory, etc. n drect $ro$orton to $roducton. Mana&ers could sm$ly total the

"ara#le costs for a $roduct and use ths as a rou&h &ude for decson-ma*n&$rocesses.

Some costs tend to reman the same e"en durn& #usy $erods, unl*e "ara#le

costs, hch rse and fall th "olume of or*. 6"er tme, these 5fed costs5 ha"e

#ecome more m$ortant to mana&ers. 7am$les of fed costs nclude the

de$recaton of $lant and eu$ment, and the cost of de$artments such as

mantenance, tooln&, $roducton control, $urchasn&, ualty control, stora&e and

handln&, $lant su$er"son and en&neern&. In the early nneteenth century, these

costs ere of lttle m$ortance to most #usnesses. 8oe"er, th the &roth of

ralroads, steel and lar&e scale manufacturn&, #y the late nneteenth century these

costs ere often more m$ortant than the "ara#le cost of a $roduct, and allocatn&

them to a #road ran&e of $roducts lead to #ad decson ma*n&. Mana&ers must

understand fed costs n order to ma*e decsons a#out $roducts and $rcn&.

or eam$le9 A com$any $roduced ralay coaches and had only one $roduct. +o

ma*e each coach, the com$any needed to $urchase :;0 of ra materals and

com$onents, and $ay ; la#orers :40 each. +herefore, total "ara#le cost for eachcoach as :hle cost accountn& s often used thn a com$any to ad n decson ma*n&,

fnancal accountn& s hat the outsde n"estor communty ty$cally sees.

nancal accountn& s a dfferent re$resentaton of costs and fnancal

6
http://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Fixed_costhttp://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Fixed_cost


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$erformance that ncludes a com$any=s assets and la#ltes. Cost accountn& can

#e most #enefcal as a tool for mana&ement n #ud&etn& and n settn& u$ cost

control $ro&rams, hch can m$ro"e net mar&ns for the com$any n the future.

Cost accountn& s the accountn& of the cost. It s made of to ords- Cost andAccountn&. +he term cost denotes the total of all e$endtures n"ol"ed n the

$rocess of $roducton. +hus, t co"ers the costs n"ol"ed n the $roducton and thecost n"ol"ed hle rece"n& t. Accountn&, on the other hand, collects andmantans fnancal records of each ncome and e$endture and ma*e a"al of suchnformaton to the concerned offcals. +hus, cost accountn& s a $ractce and

$rocess of cost hch determnes the $rofta#lty of a #usness concern #ycontrolln& the cost th the a$$lcaton of accountn& $rnc$le, $rocess and rules.Cost accountn& ncludes the $resentaton of the nformaton der"ed there from for

$ur$oses of mana&eral decson ma*n&. +hus, cost accountn& s a arts as ell asscence. It s scence #ecause t s a #ody of systematc *noled&e ha"n& certan

$rnc$les. It s an art as t reures the a#lty and s*ll th hch a costaccountant s a#le to a$$ly the $rnc$les of cost accountn& n "arous mana&eral

$ro#lems.Accordn& to >.>.?&&-@ Cost accountn& s the $ro"son of such analyss andclassfcaton of e$endture as ll ena#le the total cost of any $artcular unt of

$roducton to #e ascertaned th reasona#le de&ree of accuracy and at the sametme to dsclose eactly ho such total cost s consttuted.Accordn& to R.N. Carter, @Cost accountn& s a system of recordn& n accounts

the materals used and la#our em$loyed n the manufacture of a certan commodtyor on a $artcular %o#.

+hus, cost accountn& s consdered as an art as ell as acnece. It s also a $rme$art of accountn& system hch records systematcally the cost n"ol"ed n ramaterals and la#our used n the $rocess of $roducton and the same tmedetermnes the total cost and unt cost of $roduct. the $rocess of recordn&classfyn& and analy3n& of cost s the cost accountn&.

Ob.e+tie" o$ Co"t %++ountin/)1. Cost fndn&2. Cost $lannn& and controlln&


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2. 8el$ n Becson ma*n&


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INTRODUCTION OF MARGINAL COST

De$inition+he ncrease or decrease n the total costof a$roducton runfor ma*n&one

addtonal untof an tem. It s com$uted n stuatons here the#rea*e"en $ont

has #een reached9 the fed costsha"e already #een a#sor#ed #y the already

$roducedtemsand only the drect ("ara#le) costs ha"e to #e accounted for.

Mar&nal costs are "ara#le costsconsstn& of la#orand materal costs,$lusan

estmated$orton of fed costs (such as admnstratono"erheadsand selln&

e$enses). In com$aneshere a"era&e costsare farly constant, mar&nal costs

usually eual to a"era&e cost. 8oe"er, n ndustresthat reure hea"y ca$tal

n"estment(automo#le$lants, arlnes, mnes) and ha"e h&ha"era&e costs, t s

com$arat"ely "ery lo. +he conce$tof mar&nal cost s crtcally m$ortant n

resource allocaton#ecause, for o$tmumresults, mana&ementmust concentrate ts

resourceshere the ecessof mar&nal re"enueo"er the mar&nal cost s

mamum. Also calledchocecost, dfferental cost, or ncremental cost.

mar&nal cost s the chan&e n the total costthat arses hen the uantty $roduced

has an ncrement #y unt. +hat s, t s the cost of $roducn& one more unt of a

&ood. In &eneral terms, mar&nal cost at each le"el of $roducton ncludes any

addtonal costs reured to $roduce the net unt. or eam$le, f $roducn&

addtonal "ehcles reures #uldn& a ne factory, the mar&nal cost of the extra

"ehcles ncludes the cost of the ne factory. In $ractce, ths analyss s se&re&ated

nto short and lon&-run cases, so that o"er the lon&est run, all costs #ecome

mar&nal. At each le"el of $roducton and tme $erod #en& consdered, mar&nalcosts nclude all costs that "ary th the le"el of $roducton, hereas other costs

that do not "ary th $roducton are consdered fed.

If the &ood #en& $roduced s nfntely d"s#le, so the s3e of a mar&nal cost ll

chan&e th "olume, as a non-lnear and non-$ro$ortonal cost functon ncludes

the follon&9

9
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"ara#le terms de$endent to "olume,

constant terms nde$endent to "olume and occurrn& th the res$ect"e lot

s3e,

%um$ f cost ncrease or decrease de$endent to ste$s of "olume ncrease.

In $ractce the a#o"e defnton of mar&nal cost as the chan&e n total cost as a

result of an ncrease n out$ut of one unt s nconsstent th the dfferental

defnton of mar&nal cost for "rtually all non-lnear functons. +hs s as the

defnton fnds the tan&ent to the total cost cur"e at the $ont hch assumes that

costs ncrease at the same rate as they ere at . A ne defnton may #e useful

for mar&nal unt cost (M!C) usn& the current defnton of the chan&e n total

cost as a result of an ncrease of one unt of out$ut defned as9 +C(1)-+C() andre-defnn& mar&nal cost to #e the chan&e n total as a result of an nfntesmally

small ncrease n hch s consstent th ts use n economc lterature and can

#e calculated dfferentally.

'%t i" M%!/in%& Co"tin/

It s a costn& technue here only "ara#le cost or drect cost ll #e char&ed tothe cost unt $roduced. Mar&nal costn& also shos the effect on $roft of chan&es

n "olumeDty$e of out$ut #y dfferentatn& #eteen fed and "ara#le costs.Salent 'onts9EMar&nal costn& n"ol"es ascertann& mar&nal costs. Snce mar&nal costs are

drect cost, ths costn& technue s also *non as drect costn&FEIn mar&nal costn&, fed costs are ne"er char&ed to $roducton. +hey are

treated as $erod char&e and s rtten off to the $roft and loss account n the$erod ncurredF

E6nce mar&nal cost s ascertaned contr#uton can #e com$uted. Contr#uton sthe ecess of re"enue o"er mar&nal costs.

E+he mar&nal cost statement s the #asc documentDformat to ca$ture the

mar&nal costs.

Fe%tu!e" o$ M%!/in%& Co"tin/1

EIt s a method of recordn& costs and re$ortn& $roftsFEAll o$eratn& costs are dfferentated nto fed and "ara#le costsF

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EGara#le cost H@char&ed to $roduct and treated as a $roduct cost hlstEed cost treated as $erod cost and rtten off to the $roft and loss

Account

Mar&nal costn& s "ery hel$ful n mana&eral decson ma*n&. Mana&ement=s

$roducton and cost and sales decsons may #e easly affected from mar&nalcostn&. +hat s the reason, t s the $art of cost control method of costn&accountn&. ?efore e$lann& the a$$lcaton of mar&nal costn& n mana&eraldecson ma*n&, e are $ro"dn& lttle ntroducton to those ho are ne forunderstandn& ths m$ortant conce$t.

Mar&nal cost s chan&e n total cost due to ncrease or decrease one unt or out$ut.It s technue to sho the effect on net $roft f e classfed total cost n "ara#lecost and fed cost. +he ascertanment of mar&nal costs and of the effect on $roftof chan&es n "olume or ty$e of out$ut #y dfferentatn& #eteen fed costs and"ara#le costs. In mar&nal costn&, mar&nal cost s alays eual to "ara#le costor cost of &oods sold. >e must *no follon& formulae

a) Cont!ibution * Pe! unit, S%&e 3e! unit 2 9%!i%b&e Co"t 3e! unit

b, Tot%& 3!o$it o! &o"" Tot%& Cont!ibution 2 Tot%& Fied Co"t"

o! Cont!ibution Fied Co"t P!o$it

o! P!o$it Cont!ibution 2 Fied Co"t

+, P!o$it 9o&ume R%tio Cont!ibution S%&e B 4== * It me%n" i$ e

"e&& R") 4== 3!odu+t; '%t i&& be ou! +ont!ibution m%!/in; mo!e +ont!ibution

m%!/in me%n" mo!e 3!o$it,

d , 0!e%: Een Point i" % 3oint 'e!e Tot%& "%&e Tot%& Co"t

e, 0!e%: Een Point * In unit , Tot%& Fied e3en"e"

Cont!ibution

$,0!e%: Een Point * In S%&e" 9%&ue , 0!e%: een 3oint *in unit",

B Se&&in/ 3!i+e 3e! unit

/,0!e%: Een Point %t e%!nin/ o$ "3e+i$i+ net 3!o$it m%!/in

Tot%& Cont!ibution Cont!ibution 3e! unit

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o! $ied +o"t 3!o$it "e&&in/ 3!i+e 2 %!i%b&e +o"t 3e! unit

Di!e+t Co"tin/

+he $ractce of char&n& all drect costs to o$eratons, $rocesses or $roducts,lea"n& all ndrect costs to #e rtten-off a&anst $roft n the $erod n hch theyarse s called Brect Costn&.+hs dffers from mar&nal costn& n that some fed costs could #e consdered to

#e drect costs n a$$ro$rate crcumstances.

Cont!ibutionContr#uton s the dfference #eteen the sales and the mar&nal cost of sales. Itcontr#utes toards fed e$enses and $roft.+he contr#uton mar&n s sales mnus "ara#le e$enses.

Cont!ibution m%!/in S%&e" 2 9%!i%b&e E3en"e"

>hen the contr#uton mar&n s e$ressed as a $ercenta&e of sales t s referred toas the contr#uton mar&n rato. +he contr#uton mar&n $er unt s the $roductJsselln& $rce mnus ts "ara#le costs and e$enses.

9%!i%b&e Co"tGara#le Cost s a cost hch tends to "ary drectly th "olume of out$ut.Gara#le costs are sometmes referred to as drect costs n system of Brect Costn&.Gara#le 7$enses mean the total of the com$anyJs "ara#le costs $lus ts "ara#le

e$enses.

Fied Co"ted Cost s a cost hch tends to #e unaffected #y "aratons n "olume of out$ut.ed costs de$end manly on the efflu on of tme and do not "ary drectly th"olume or rate of out$ut.ed costs are sometmes referred to as $erod costs n system of Brect Costn&.

Fied E3en"e"mean the com$anyJs total amount of fed costs $lus ts fed e$enses.

Fied +o"t" %nd Fied e3en"e"ed costs and fed e$enses are those hch do not chan&e as "olume chan&es.

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9%!i%b&e +o"t" %nd 9%!i%b&e e3en"e"Gara#le costs and "ara#le e$enses ncrease as "olume ncreases and they lldecrease hen "olume decreases. +he relatonsh$ of contr#uton to Sales llreman constant under dfferent le"els of sales only f9

1. Gara#le cost $er unt remans constant.

2. ed costs reman the same.


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Sales - Gara#le Cost K ed 7$enses or L 'roft D /ossS - G K or L '

Cont!ibution1Sales L Gara#le Cost K Contr#uton K S - Ged 7$enses or L 'roft D /oss K Contr#uton K or L 'In sm$le form, S L G K or L '

Mi""in/ F%+to!1In the a#o"e four factors, f any three factors are *non, the remann& one can #eeasly found out.S%&e"K Gara#le Cost ed 7$enses 'roft

9%!i%b&e Co"t K Sales L (ed 7$enses 'roft)Fied E3en"e"K Sales L Gara#le Cost L 'roftP!o$itK Sales L Gara#le Cost L ed 7$enses

Unit" "o&d1!nts sold K Contr#uton mar&n D Contr#uton mar&n $er unt

0!e%: Een Point1A #usness s sad to #rea* e"en hen ts total sales are eual to ts total costs.It s a $ont here+here s no $roft or no loss.Contr#uton s eual to ed 7$enses.0!e%: Een Point *in Unit",K +otal ed 7$enses D (Selln& 'rce $er !nt LMar&nal Cost $er !nt)+he anser ll #e n unts and not n "alue #ecause #rea* e"en $ont s #ased onunt cost.

0!e%: Een S%&e"1S L G K '

At ?rea* 7"en 'ont 'roft euals 3ero.8ence, S L G K

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or ?rea* 7"en 'ont, the euaton s S L G K B"dn& #oth sdes #y S L G, ( S L G) D (S L G) K D (S L G) .e. 1 K D (S L G)Mult$lyn& #oth sdes #y S, S 1 K ( S) D (S L G)T'e!e$o!e; t'e $o!mu&% $o! t'e +%&+u&%tion o$ b!e%: een "%&e" i"1

* F K S, *S @ 9,

C%&+u&%tion o$ S%&e" $o! % de"i!ed o! e3e+ted P!o$it1(ed 7$enses 'roft) D (Selln& 'rce $er !nt L Mar&nal Cost $er !nt)6r(ed 7$enses 'roft) D Contr#uton $er !ntT'e $o!mu&% $o! t'e +%&+u&%tion o$ S%&e" to e%!n %n e3e+ted o! de"i!ed 3!o$it

i"1* *F P, K S, * S @ 9,

P!o$it 9o&ume R%tio o! Cont!ibution S%&e" R%tio*P9 R%tio, o! *CS R%tio,

P9 R%tio

Contr#uton D Sales .e. C D S6r

(Sales L Gara#le Cost) D Sales .e. (S L G) D S6r(ed 7$enses 'roft) D Sales .e. ( ') D S6rChan&es n contr#uton n to $erods D Chan&es n Sales n to $erods6rChan&es n 'roft n to $erods D Chan&es n Sales n to $erods+he rato can #e shon n the form of $ercenta&e f the formula s mult$led #y100.+hs rato can #e used for the calculaton of

0!e%: Een Points Fied Co"t" P9 R%tioK D 'DG RatoFo! t'e +%&+u&%tion o$ "%&e" to e%!n % de"i!ed o! e3e+ted 3!o$it i"

*Fied Co"t" P!o$it, P9 R%tioK ' D 'DG RatoCont!ibution P9 R%tio

9%!i%b&e Co"t"K Sales (1 L 'DG Rato)Cont!ibutions Sales 'DG Rato

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M%!/in o$ S%$et# *MS,It s the dfference #eteen the actual sales and the sales at #rea* e"en $ont.Sales or 6ut$ut #eyond #rea* e"en $ont s *non as mar&n of safety.M%!/in o$ S%$et# *MS, K 'resent Sales L ?rea* 7"en Sales6rK 'roft D 'DG Rato

0!e%:2Een %nd T%!/et In+omeS%&e" Tot%& 9%!i%b&e Co"t" Tot%& Fied Co"t" T%!/et In+ome

>here +ar&et Income s 3ero, thenSales K +otal Gara#le Costs +otal ed Costs

'i+' i" t'e 0!e%: een "%&e")0!e%:2Een Point in Unit"K +otal ed Costs D Contr#uton Mar&n 'er !nt0!e%:2Een Point in S%&e"K +otal ed Costs D Contr#uton Mar&n Rato

A&te!n%tie Met'od" o$ P!odu+tion+he method hch &"es the &reatest contr#uton s to #e ado$ted *ee$n& thelmtn& factor n "e.

Diversification of Products

In order to decde a#out the $rofta#lty of the ne $roduct, t s assumed

that the manufacture of the ne $roduct ll not ncrease fed costs of theconcern.

If the $rce real3ed from the sale of such $roduct s more than ts "ara#le

cost of $roducton t s orth tryn&.

If the data s $resented under a#sor$ton costn& method, the decson ll #e

ron&.

If th the ntroducton of ne $roduct, there s an ncrease n the fed

costs, then such s$ecfc ncrease n fed costs must #e deducted from thecontr#uton for ma*n& any decson.

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eneral fed costs ll #e char&ed to the old $roductD$roducts.

Closing down or suspending activities

+he decson to close don or sus$end ts act"tes ll de$end hether $roductsare ma*n& contr#uton toards fed costs or not.e. >hether the contr#uton s more than the dfference n fed costs (#y or*n&at normal o$eratons and hen the $lant or $roduct s closed don or sus$ended)If the #usness s closed don9

+here may #e certan fed costs hch could #e a"oded.

+here ll #e certan e$enses hch ll ha"e to #e ncurred at the tme of

closn& the o$eratons l*e redundancy $ayments, necessary mantenance ofthe $lant or o"erhauln& of $lant on reo$enn& trann& of $ersonal etc.

Such costs are assocated th closn& don of #usness and must #e ta*en

nto consderaton #efore ta*n& any decson.

Fixed costs may be general or specific

eneral fed costs may nor may not reman constant hle s$ecfc costs

ll #e drectly affected #y closn& don of the o$eratons.

?esdes, o#solescence f any, retann& the customers, relatonsh$ th the

su$$lers, non-collecton of dues from customers or nterest on o"erdraft forclosn& don the o$eratons must #e ta*en nto consderaton.

Alternative Course of Action

>hate"er course of acton s ado$ted, certan fed e$enses ll remanunaffected.+he crteron s the effect of alternat"e course of acton u$on the mar&nal("ara#le) costs n relaton to the re"enue o#taned.+he course of acton hch yelds the &reatest contr#uton s the most $rofta#le to

#e folloed #y the mana&ement.

Level of activity planning

Mamum contr#uton at a $artcular le"el of act"ty ll sho the $oston ofmamum $rofta#lty.

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CHAPTER 2

APPLICATION OF MARGINAL COSTING

+hs s a ell *non conce$t of economc theory. It may #e descr#ed as thechan&e n total cost hch arses as a result of an ncrease and decrease #y one untn "olume of out$ut. Mar&nal cost s an amount at any &"en "olume of out$ut #yhch a&&re&ate costs are chan&ed f the "olume of out$ut s ncreased ordecreased #y one unt.

Mar&nal cost s synonymous th "ara#le costs, $rme costs $lus "ara#leo"erheads n the short run #ut, n a ay, ould also nclude fed cost n the

$lannn& $roducton act"tes o"er a lon& $erod of tme n"ol"n& an ncrease nthe $roduct"e ca$acty of #usness. +hus n decson ma*n& $ro#lems ,mar&nalcosts are related to chan&e n out$ut under $artcular crcumstances of a case.

+heoretcally mar&nal cost and dfferental cost are the same. If there s no chan&e

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n fed cost then #oth these cost ll #e same. +hus mar&nal cost does not ncludefed cost at all hereas dfferental cost may nclude an element of fed cost asell f fed cost chan&es due to a decson.

Mar&nal costn& s a "ery m$ortant technue of decson ma*n&. It s acom$arat"ely ne area n the feld of accountn& #ut t s &radually &ann& moreand more acce$tance. It s the method of matchn& cost th re"enue to determne

$erodc ncome. It s the ascertanment of mar&nal cost and of the effect on $roftof chan&es on "olume or ty$e of out$ut #ydfferentatn& fed costs and "ara#le cost. In ths contet t s to #e noted that t snot a system of costn& l*e $rocess or %o# costn& #ut t s sm$ly an a$$roach tothe $resentaton of accountn& nformaton meann&ful to mana&ement. n ths allcost are se&re&ated nto fed and "ara#le com$onents. only the "ara#le costs are

re&arded as $roduct cost and are used to "alue n"entory and cost of &oods sold.thefed cost are treated as $erod cost and are char&ed drectly to $roft and lossaccount. thus no $art of fed manufacturn& cost s deferred to the net $erod asn"entory. hle $re$arn& a $roft and loss account on mar&nal costn& #ass, the"ara#le or mar&nal cost of sales s deducted from sales "alue and the dfference stermed as contr#uton mar&n.

Mar&nal costn& a$$lcaton n mana&eral decson ma*n&9

+he technue of mar&nal costn& s a "alua#le ad to mana&ement n ta*n&

"arous $olcy decsons. ollon& are the fe $ro#lems here mana&eralcostn& analyss s useful91) 'rcn& of $roducts9 $roduct $rcn& s usually consdered to #e a dffcult

$ro#lem,$artcularly n non-re$ett"e $roducton. the $ro#lem s to euate thedemand and su$$ly n such cases mar&nal costn& s "ery hel$ful. +hs technuecan hel$ mana&ement n fn& $rces n such crcumstances9

a) A trade de$resson n ndustry#) Bum$n&c) A seasonal fluctuatons

Ho i" t'e +on+e3t o$ m%!/in%& +o"tin/ 3!%+ti+%& %33&ied

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+he conce$t of mar&nal costn& s $ractcally a$$led n the follon& stuatons9

-E%&u%tion o$ Pe!$o!m%n+e9 +he e"aluaton of the $erformance of "arousde$artments or $roducts can #e e"aluated th the hel$ of mar&nal costn& hchs #ased on contr#uton &eneratn& ca$acty.

- P!o$it P&%nnin/9 +hs technue throu&h the calculaton of 'DG Rato hel$s themana&ement to $lan the act"tes n such a ay that the $roft can #e mamsed.

- Fi%tion o$ Se&&in/ P!i+e9 +he technue of mar&nal costn& asssts themana&ement to f the $rce n such a ay so that $rces fed can co"er at least the"ara#le cost.

- M%:e o! 0u# de+i"ion9 Mar&nal cost analyss hel$s the mana&ement n ma*n&or #uyn& decson.

Becson Ma*n&

o aton of selln& $rces

o In house ma*e or #uy decsons

o Selectn& $roducton th ey or lmtn& factor

o 7ffect of chan&e n sales $rce

o Mantann& a desred le"el of $rofts

o Selecton of a suta#le $roduct m

o Alternat"e methods of $roducton

o B"ersfcaton of $roducts

o Acce$tn& an addtonal order

o Bro$$n& a $roduct

o Closn& don or sus$endn& act"tes

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o Alternat"e course of acton

o /e"el of act"ty $lannn&

- O3timiin/ P!odu+t Mi9 +o mamse $rofts and ncrease sales "olume t snecessary to decde an o$tm3ed m or $ro$orton n hch "arous $roducts of acom$any can #e sold.

- Co"t Cont!o&9 Mar&nal Costn& s a technue of cost classfcaton and cost$resentaton hch ena#le the mana&ement to concentrate on the controlla#le costs.

- F&eib&e 0ud/et 3!e3%!%tion9 As the mar&nal costn& $artcularly classfescosts as fed and "ara#le costs hch facltates the $re$araton of fle#le

#ud&ets.

Advantages and Dsadvantages !" #a$gna% C!stng

Ad%nt%/e" %nd 0ene$it" o$ M%!/in%& Co"tin/

Co"t +ont!o&1Mar&nal costn& ma*es t easer to determne and control costs of

$roducton. ?y a"odn& the ar#trary allocaton of fed o"erhead costs,

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mana&ement can concentrate on ache"n& and mantann& a unform and

consstent mar&nal cost.

Sim3&i+it#1Mar&nal costn& s sm$le to understand and o$erate and t can #e

com#ned th other forms of costn& (e.&. #ud&etary costn& and standard costn&)thout much dffculty.

E&imin%tion o$ +o"t %!i%n+e 3e! unit1Snce fed o"erheads are not char&ed to

the cost of $roducton n mar&nal costn&, unts ha"e a standard cost.

S'o!t2te!m 3!o$it 3&%nnin/1Mar&nal costn& can hel$ n short-term $roft

$lannn& and s easly demonstrated th #rea*-e"en charts and $roft &ra$hs.

Com$arat"e $rofta#lty can #e easly assessed and #rou&ht to the notce of the

mana&ement for decson-ma*n&.

A++u!%te oe!'e%d !e+oe!# !%te1+hs method of costn& elmnates lar&e

#alances left n o"erhead control accounts, hch ma*es t easer to ascertan an

accurate o"erhead reco"ery rate.

M%imum !etu!n to t'e bu"ine""1>th mar&nal costn&, the effects of

alternat"e sales or $roducton $olces are more readly a$$recated and assessed,

ensurn& that the decsons ta*en ll yeld the mamum return to the #usness.

Di"%d%nt%/e" %nd Limit%tion" o$ M%!/in%& Co"tin/

C&%""i$#in/ +o"t"1It s "ery dffcult to se$arate all costs nto fed and "ara#le

costs clearly, snce all costs are "ara#le n the lon& run. 8ence such classfcaton

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sometmes may &"e msleadn& results. urthermore, n a frm th many dfferent

*nds of $roducts, mar&nal costn& can $ro"e less useful.

A++u!%te !e3!e"entin/ 3!o$it"1Snce the closn& stoc* conssts only of "ara#le

costs and &nores fed costs (hch could #e consdera#le), ths &"es a dstorted$cture of $rofts to shareholders.

Semi2%!i%b&e +o"t"1 Sem-"ara#le costs are ether ecluded or ncorrectly

analy3ed, leadn& to dstortons.

Re+oe!# o$ oe!'e%d"1>th mar&nal costn&, there s often the $ro#lem of

under or o"er-reco"ery of o"erheads, snce "ara#le costs are a$$ortoned on an

estmated #ass and not on actual "alue.

Ete!n%& !e3o!tin/1Mar&nal costn& cannot#e used n eternal re$orts, hch

must ha"e a com$lete "e of all ndrect and o"erhead costs.

In+!e%"in/ +o"t"1Snce t s #ased on hstorcal data, mar&nal costn& can &"e an

naccurate $cture n the $resence of ncreasn& costs or ncreasn& $roducton.

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CHAPTER 3

THE LIMITATION OF USING THE MARGINAL COSTING

TECHNIQUEMar&nal costn& s defned as the ascertanment of mar&nal cost and of the effecton $roft of chan&es n "olume or ty$e of out$ut #y dfferentatn& #eteen fedcosts and "ara#le costs.

Limit%tion" o$ M%!/in%& Co"tin/ Te+'ni(ue":

1. It s dffcult to classfy eactly the e$enses nto fed and "ara#le cate&ory.Most of the e$enses are nether totally "ara#le nor holly fed.2. Contr#uton tself s not a &ude unless t s ln*ed th the *ey factor.


25/25

CHAPTER 3

CONCLUSION

Mar&nal costn& s a useful analyss tool hch usually hel$s mana&ement ma*e

decsons and understand the anser to s$ecfc uestons a#out re"enue.

+hat sad, t s not a costn& methodolo&y for creatn& fnancal statements. In fact,

accountn& standards e$lctly eclude mar&nal costn& from fnancal statement

re$ortn&. +herefore, t does not fll the role of a standard costn&, %o# costn&, or

$rocess costn& system, all of hch contr#ute actual chan&es n the accountn&

records.

Stll, t can #e used to dsco"er rele"ant nformaton from a "arety of sources and

a&&re&ate t to hel$ mana&ement th a num#er of tactcal decsons. It s most

useful n the short-term, and least useful n the lon&-term, es$ecally here a frm

needs to &enerate suffcent $roft to $ay for a lar&e amount of o"erhead.

urthermore, drect costn& can also cause $ro#lems n stuatons herencremental costs may chan&e s&nfcantly, or here ndrect costs ha"e a #earn&

on the decson.

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Application of Marginal Costing Technique & Its Limitation