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    (Unit-II) Marginal Costing and Absorption Costing

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    Ishita Gupta
    Marginal costing is a technique that separates costs into fixed and variable components. Fixed costs are treated as period costs and charged to the income statement, while marginal costs represent the cost of producing each additional unit and are assigned to inventory. Marginal cost is the change in total cost from producing one additional unit of output. It is useful for decision making, pricing, break-even analysis, and evaluating profitability and departments. Contribution is the difference between sales revenue and variable costs and represents the funds available to cover fixed costs and profit.

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    (Unit-II) Marginal Costing and Absorption Costing

    Uploaded by

    Ishita Gupta
    45 views22 pages
    Marginal costing is a technique that separates costs into fixed and variable components. Fixed costs are treated as period costs and charged to the income statement, while marginal costs represent the cost of producing each additional unit and are assigned to inventory. Marginal cost is the change in total cost from producing one additional unit of output. It is useful for decision making, pricing, break-even analysis, and evaluating profitability and departments. Contribution is the difference between sales revenue and variable costs and represents the funds available to cover fixed costs and profit.

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    Cost accounting

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    Marginal costing is a technique that separates costs into fixed and variable components. Fixed costs are treated as period costs and charged to the income statement, while marginal costs represent the cost of producing each additional unit and are assigned to inventory. Marginal cost is the change in total cost from producing one additional unit of output. It is useful for decision making, pricing, break-even analysis, and evaluating profitability and departments. Contribution is the difference between sales revenue and variable costs and represents the funds available to cover fixed costs and profit.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    45 views22 pages

    (Unit-II) Marginal Costing and Absorption Costing

    Uploaded by

    Ishita Gupta
    Marginal costing is a technique that separates costs into fixed and variable components. Fixed costs are treated as period costs and charged to the income statement, while marginal costs represent the cost of producing each additional unit and are assigned to inventory. Marginal cost is the change in total cost from producing one additional unit of output. It is useful for decision making, pricing, break-even analysis, and evaluating profitability and departments. Contribution is the difference between sales revenue and variable costs and represents the funds available to cover fixed costs and profit.

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    (Unit-II)

    Marginal Costing and Absorption Costing


    Introduction
    Marginal cost is nothing but a change occurred in the
    total cost due to changes taken place on the level of
    production i.e., either an increase/decrease by one unit
    of product.
    Fixed manufacturing costs are not allotted to products
    but are considered as period costs and thus charged
    directly to Profit and Loss account of the year.
    Fixed cost also do not enter inventory valuation.
    Example
    Definition of Marginal Cost

    According to ICMA, London “Marginal cost is the


    amount at any given volume of output, by which
    aggregate costs are charged, if the volume of output
    is increased or decreased by one unit.”

    Basically, it is the additional cost of producing an


    additional unit of product. It is the total of all direct
    and variable costs.
    MCQ
    • Which of the following statements are true?

    A) Marginal costing is not an independent system of costing.

    B) In marginal costing all elements of cost are divided into fixed and variable components.

    C) In marginal costing fixed costs are treated as product cost.

    D) Marginal costing is not a technique of cost analysis.

    a) A and B

    b) B and C

    c) A and D

    d) B and D
    Features of Marginal Costing
    Segregation of cost into fixed and variable elements

    Fixed cost as period costs. Charged to statement of P and L

    Marginal cost as product cost

    Pricing : Price is equal to marginal cost plus contribution

    Valuation of inventory - stock of WIP and finished goods valued at this


    MC.

    Marginal costing and profit


    MCQ
    • The technique of marginal costing is based on
    classification of cost into ------
    • A. Period and Product Cost

    • B. Fixed and Variable Cost

    • C. Variable and Semi-variable Cost

    • D. None of these
    Practical Example
    The firm XYZ Ltd. incurs ` 1000 for the production
    of 100 units at one level of operation. By increasing
    only one unit of product i.e. 101 units, the firm’s
    total cost of production amounted ` 1010.
    Total cost of production at first instance (C’) = `
    1000 Total cost of production at second instance
    (C”) = ` 1010 Total number of units during the first
    instance (U’) = 100 Total number of units during
    the second instance (U”) = 101
    Marginal Cost Calculation
    Change in the level of units = U’’-U’= 101-100= 1
    Change in the cost = C”-C’ = 1010-1000= 10
    Therefore, Marginal Cost = Change in total cost/
    Change in units = 10/1= Rs.10
    Marginal cost is nothing but a cost which
    incorporates the incremental changes in the cost of
    production due to either an increase or decrease in
    the level of production by one unit, meant as
    incremental cost.
    MCQ
    • ABC Ltd. is incurring 5500 on producing100 chocolates
    in company. The total cost rose to 6700 after increasing
    production of chocolate by one unit, then marginal cost
    will be
    A. 1000

    B. 1200

    C. 1300

    D. 1500
    Importance
    useful in decision
    Easy to operate and
    useful in profit making about fixation
    simple to
    planning of selling price, make
    understand.
    or buy decision

    Evaluation of
    Break even analysis
    provides control over different
    and P/V ratio are
    variable cost. departments is
    useful techniques
    possible

    Fixed overhead
    recovery rate is easy.
    Contribution
    It is the difference between sales value and marginal (variable) cost of sales

    also known as contribution or gross margin. Thus, it is calculated as:

    Contribution = Sales – Variable cost

    The costs are classified into two categories viz. fixed and variable cost.

    Variable cost per unit is considered as marginal cost of the product. Fixed

    costs are charged against contribution of the transaction.

    Therefore, Selling price of the product = marginal cost + contribution.

    Contribution

    Method of Difference= Sales - Variable Cost , Method of Meeting = Fixed

    cost + Profit
    Marginal costing profitability
    statement
    Sales xxxx
    (Variable Cost) xxxx
    Contribution xxxx
    (Fixed Cost) xxxx
    Profit xxxx
    Practical Example
    • Example: Sales ` 100,000, variable cost `
    25,000/- and fixed cost ` 20,000 find out the
    contribution and profit.
    Sales 1,00,000
    Variable Cost (-) 50,000
    Contribution 50,000
    Fixed Cost (-)20,000
    Profit 30,000
    Contribution and Marginal Cost Equation
    C = S-V…(i)
    C = F+P…(ii)
    C = F-L…..(iii)
    From this, S-V= F+P
    If any of the three out of four are known, the fourth
    can be known:
    P=S-V-F
    P=C-F
    F=C-P
    V=S-F-P
    Sales =12000, variable cost=7000, fixed
    cost=4000
    • Thus, C=S-V (12000-7000) =5000
    • P= C-F (5000-4000) =1000
    Thus, profit= 1000
    i. If sales not given, but contribution is given
    S= 5000 +7000= 12000
    ii. If fixed cost is not given, but profit is given
    F= 5000-1000= 4000
    iii. If variable cost is not given, but sales is given
    V= S-C (12000-5000) = 7000
    MCQ
    • Period cost is associated with
    • A. Fixed Cost
    • B. Variable Cost
    • C. Prime Cost
    • D. None of these

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