Marginal Costing, Features, Advantages , Disadvantage

MARGINAL COSTING
INTRODUCTION
DEFINITION
SALIENT FEATURES OF MARGINAL COSTING
ADVANTAGES AND DISADVANTAGES OF MARGINAL COSTING
DIFFERENCE BETWEEN ABSORPTION AND MARGINAL COSTING
FORMULAE

INTRODUCTION
Marginal costing is a technique of costing fully oriented towards managerial decision
making and control. Marginal costing is not a method of cost ascertainment like job or process
or operating costing. Marginal costing, being a technique, can be used in conjunction with any
method of cost ascertainment. It can also be used in combination with other techniques such
as budgeting and standard costing.
The emphasis is on behaviour of the costs and their impact on profitability.
MEANING
It is the additional cost of producing and additional unit of the products.
EX: If the cost of producing 10 units is Rs.1000 and the total cost of producing 11 units
DEFINITION
Marginal costing is defined by I.C.M.A. as “the ascertainment of marginal costs and of the
effect on profit of changes in volume or type of output by differentiating between fixed costs
and variable costs.

SALIENT FEATURES OF MARGINAL COSTING
Marginal costing is a
technique of control or
decision making.
Under marginal costing
the total cost is classified
as fixed and variable
costs.
Contribution is
ascertained by reducing
the marginal cost or
variable cost from the
selling price.
Profit is ascertained by
reducing the fixed cost
from the contribution of
all the products or
departments or processes
or divisions, etc.
The profitability of various
levels of activity is
ascertained by
calculating cost-volume-
profit relationship.

ADVANTAGES OF MARGINAL COSTING
Simplicity
Stock
valuation
Meaningful
reporting
Profit
planning
Cost control
and cost
reduction

Not suitable
for external
reporting
Under
valuation of
stock
Not
applicable in
all type of
business
Less scope
for long-term
policy
decisions
Classification
of cost
DISADVANTAGES OF MARGINAL COSTING

ABSORPTION COSTING
 Fixed costs form part of total costs of
production and distribution.
 Stocks and work-in-progress are valued at
both fixed and variable costs i.e., total cost.
 When there is no sales the entire stock is
carried forward and there is no trading profit
or loss.
 Abnormal costing lays emphasis on
production.
MARGINAL COSTING
 Variable costs alone form part of cost production,
and sales whereas fixed costs are charged against
contribution for determination of profit.
 Stocks are valued at variable cost only.
 If there is no sales, the fixed overhead will be
treated as loss in the absence of contribution. It is
not carried forward as part of stock value.
 Marginal costing emphasis selling and pricing
aspects.
DIFFERENCE BETWEEN MARGINAL COSTING AND ABSORPTION COSTING

FORMULAE
1) Contribution = Fixed cost + Profit
Contribution = Sales – Variable cost
Sales – Variable cost = Fixed cost + Profit
2) Profit Volume Ratio = Contribution
______________ *100
Sales
Profit Volume Ratio = Change in profit
___________________*100
Change in Sales
Profit Volume Ratio = Sales – Variable cost
_______________________*100
Sales

3) Breakeven Point
Breakeven Point (in units) = Fixed cost
___________________
Contribution per unit
Breakeven Point (in Rupees) = Fixed Cost
______________________
Profit Volume Ratio
4) Margin of Safety (MOS)
MOS = Actual Sales – Breakeven Sales
MOS (in units) = Profit/Contribution per unit
MOS (in rupees) = Profit/Profit Volume Ratio

ILLUSTRATION 12
The p/v ratio of a firm dealing in precision instruments is 50% and MOS is 40%. You are required to work-
out BEP and the net profit if the sales volume is Rs. 50,00,000. If 25% of variable cost is labour cost, what
will be the effect on BEP and profit when labour efficiency decreases by 5%?
SOLUTION
1) CALCULATION OF BEP
Margin of safety is 40% of sales
MOS = 50,00,000*40/100
= Rs.20,00,000
BEP = sales – MOS
= 50,00,000 – 20,00,000
= Rs.30,00,000
Calculation of fixed cost
BEP = Fixed cost
______________
P/V Ratio
Fixed cost = BEP * P/V Ratio
= 30,00,000 * 50/100
= Rs.15,00,000

2) CONTRIBUTION OF PROFIT
Contribution = Sales * P/V Ratio
= 50,00,000 * 50/100
= Rs.25,00,000
Net Profit = Contribution – Fixed Cost
= 25,00,000 – 15,00,000
= Rs. 10,00,000
3) EFFECTIVE OF DECREASE IN LABOUR EFFICIENCY BY 5%
Variable cost = Sales – Contribution
= 50,00,000 – 25,00,000
= Rs. 25,00,000
Labour cost = 25,00,000 * 25/100
= Rs. 6,25,000
New labour cost when labour efficiency decreases by 5%
= 6,25,000 * 100/95
= Rs. 6,57,895
Increase in labour cost= 6,57,895 – 6,25,000
= Rs. 32,895
New variable cost = 25,00,000 – 32,895
= Rs. 25,32,895

Contribution = 50,00,000 – 25,32,895
= Rs. 24,67,105
Profit = Contribution – Fixed cost
= 24,67,105 – 15,00,000
= Rs. 9,67,105
New P/V = 24,67,105/50,00,00 *100
= 49.3421%
New BEP = Fixed cost/Profit Volume
= 15,00,000/49.3421 *100
= Rs. 30,40,000

Marginal Costing, Features, Advantages , Disadvantage

Related slideshows

More Related Content

What's hot

What's hot (20)

Similar to Marginal Costing, Features, Advantages , Disadvantage

Similar to Marginal Costing, Features, Advantages , Disadvantage (20)

Recently uploaded

Recently uploaded (20)

Marginal Costing, Features, Advantages , Disadvantage