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Marginal Costing A Practical Approach

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27 views10 pages

Marginal Costing A Practical Approach

Uploaded by

ashokkapse6998
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Marginal Costing: A Practical

Approach
Presented by: Arshad Maniyar, SYBBA,

Roll No: 120

Marginal costing is a cost accounting method that focuses on the variable


costs associated with producing a product or service. It helps businesses
make informed decisions about pricing, production levels, and profitability.
This presentation will delve into the core concepts, applications, and
advantages of using marginal costing.
What is Marginal Costing?
Variable Costs Fixed Costs
Costs that change directly with Costs that remain constant
the volume of production, such regardless of production levels,
as raw materials and direct such as rent and salaries.
labor.

Marginal Cost
The additional cost incurred when producing one more unit of a product
or service.
Characteristics of Marginal
Costing
Focus on Variable Costs
1 Marginal costing centers on variable costs, which change with
production volume.

Fixed Costs Ignored


2 Fixed costs, which remain constant, are not considered in
determining product costs.

Contribution Margin
The difference between sales revenue and variable costs,
3
indicating the amount that contributes to fixed costs and
profit.

Decision-Making Tool
4 Used to make informed decisions about pricing, production
levels, and product mix.
Contribution Margin and Break-Even Analysis
Contribution Margin Break-Even Analysis

The contribution margin represents the amount each unit sold Break-even analysis determines the sales volume required to
contributes to covering fixed costs and generating profit. cover all fixed costs, resulting in zero profit.

It's calculated by subtracting variable costs from sales revenue. It helps businesses understand the relationship between sales,
costs, and profitability.
Advantages of Marginal Costing

Profitability Insights Effective Decision-Making


Marginal costing provides valuable insights into profitability It empowers businesses to make better decisions regarding
by separating fixed and variable costs. This allows pricing, production levels, and product mix. By focusing on
businesses to understand how different products or variable costs, businesses can optimize their resource
services contribute to overall profitability. allocation and maximize profitability.

Enhanced Cost Control Improved Pricing Strategies


Marginal costing helps businesses identify and control It supports the development of effective pricing strategies.
variable costs, leading to more efficient operations and By considering the contribution margin of each product,
improved cost management. By understanding the businesses can set prices that ensure profitability and
relationship between production and variable costs, competitiveness in the market.
businesses can streamline processes and minimize
unnecessary expenses.
Disadvantages of Marginal Costing
Ignores Fixed Costs
1
Fixed costs are essential, but marginal costing doesn't consider them when calculating product cost.

Oversimplification
2 Marginal costing can be too simplistic, not accounting for all costs, which can be
misleading.

Limited Use
3 It's not suitable for industries with high fixed costs or complex
production processes.
Applications of Marginal
Costing

Production Planning Pricing Decisions


Determine optimal production levels Set competitive prices while ensuring
to maximize profits. profitability.

Sales and Marketing Inventory Management


Analyze the profitability of different Evaluate the cost of holding
products or customer segments. inventory and determine optimal
stock levels.
Difference between Absorption Costing and Marginal
Costing
Absorption Costing Marginal Costing

Allocates all manufacturing costs, both fixed and variable, to Focuses only on variable manufacturing costs, excluding fixed
each unit produced. It considers all production costs, including overhead. This approach considers only the costs that directly
direct materials, direct labor, variable overhead, and fixed vary with the volume of production.
overhead.
Pricing Decisions using
Marginal Costing

1
Cost-Plus Pricing
Set prices based on cost per unit, adding a markup for profit.

2
Value-Based Pricing
Determines price based on perceived value to customers.

3
Competitive Pricing
Compares prices to competitors, adjusting based on market factors.
Case Studies and Examples
1 Manufacturing Industry
A manufacturing company used marginal costing to optimize
production runs, reducing excess inventory and improving
profitability.

2 Retail Business
A retail store utilized marginal costing to adjust pricing
strategies, leading to increased sales and higher contribution
margins.

3 Service Sector
A service company implemented marginal costing to analyze
the profitability of different service packages, resulting in
more targeted marketing efforts.

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