marginal costing.pptx

An alternative to absorption costing is marginal costing .
Under this technique only variable costs are changed as product costs and included in inventory valuation.
Fixed manufacturing costs are not allowed to products but are considered as sand thus charged directly to profit and loss account of the year.
Fixed cost also do not enter in stock valuation.
Both absorption costing an marginal costing treat on manufacturing costs

1. Marginal cost; MARGINAL COSTING, DIFFERENTIAL COSTING & ABSORPTION COSTING

2. Absorption costing [ traditional/conventional/full costing ] This is a total cost technique under which total cost [i.e. fixed cost as well as variable cost] is charged as production cost. In other words the absorption costing ,all manufacturing cost are absorbed in the cost of the products produced . In this system the factory overhead are absorbed on the basis of a predetermined overhead rates , based on normal capacity. Absorption costing approach is same as used in cost sheet

3. Advantages of absorption costing simple and most commonly used technique to ascertaining cost Ensures that all costs including fixed and variable related production are charged to products processes or operations. Ensures correct fixation of selling prices in long run as fixed costs Disadvantages of absorption costing Preparing flexible budgets under absorption costing is not possible Comparison and cost control becomes difficult when output level change with cost per unit Not helpful in taking some managerial decisions like accept or reject decisions ,make or buy decisions close or shut down decisions etc

4. Marginal cost Marginal cost is the additional cost of producing an additional unit of product. It is the total of all variable costs. it is composed of all direct costs and variable costs . An important point is that marginal cost per unit remains unchanged ,irrespective of the level of activity.

5. example

6. Marginal costing [ variable costing /direct costing ] An alternative to absorption costing is marginal costing . Under this technique only variable costs are changed as product costs and included in inventory valuation. Fixed manufacturing costs are not allowed to products but are considered as sand thus charged directly to profit and loss account of the year. Fixed cost also do not enter in stock valuation. Both absorption costing an marginal costing treat on manufacturing costs [i.e. administration, selling and distribution overheads ]as periods costs.

7. Advantages of marginal costing Helps in cost control Helps management in production planning Facilitates study of relative profitability Profit planning Management reporting Disadvantages of marginal costing All cost are not divisible into fixed and variable Based upon the assumptions which may not hold good under all circumstances Selling prices do not remain constant for ever Marginal costing completely ignores time factor

8. Difference b/w absorption costing and marginal costing Total cost [ fixed and variable ] is charged to the cost of products Fixed cost is included in the cost of products Opening and closing stocks are valued at total cost which includes fixed as well as variable cost Profitability is measured by profit earned by various products or departments Only variable cost is charged to products Fixed cost is not included in the cost of products Stocks are valued only at variable costs Profitability is judged by the contribution made by the various products and departments

9. FORMAT OF INCOME STATEMENT [ ABSORPTION COSTING ]

10. FORMAT OF INCOME STATEMENT [ MARGINAL COSTING ]

11. Differential costing Differential costing is the increase or decrease in total cost or the change in specific elements of cost that result from any variation in operations. It’s the difference between the cost of two alternatives decision. Change in cost due to ;- a . change in activity. b. change in level of activity .

12. Difference b/w differential costing and marginal costing Differential costing is the difference between the cost of two alternatives decisions or of a change in output levels The purpose of differential costing is to evaluate the most suitable option between alternatives Cost of two scenarios are compared and the less costly alternative is selected Marginal costing considers the change in the costs in order to produce an additional unit of output The purpose of marginal costing is to evaluate whether it is beneficial to produce an additional unit /small number of additional units Marginal cost is with marginal revenue to calculate the impact of a decision