Saturday, December 7, 2019

MARGINAL COSTING




·         MARGINAL COSTING
MEANING
FEATURES
ASSUMPTIONS
ADVANTAGES
LIMITATIONS


   BY SHASHI AGGARWAL
   LIMITATION OF ABSORPTION OF COSTING
1.       ABSORPTION COSTING IS ALSO KNOWN AS FULL COSTING
2.       PRACTICE OF CHARGING ALL COSTS BOTH VARIABLES AND FIXED COSTS
3.       COST PER UNIT REMAINS THE SAME ONLY WHEN THE LEVEL OF OUTPUT REMAINS THE SAME
4.       DEPENDENT ON LEVEL OF OUTPUT SO DIFFERENT UNIT COSTS ARE OBTAINED FOR DIFFERENT LEVEL OF OUTPUT
5.       IT IS NOT VERY USEFUL FOR TAKING MANAGERIAL DECISIONS.

   NEED OF MARGI ANAL COSTING
1.       AS WE KNOW ELEMENTS OF TOTAL COST = FIXED EXPENSES + VARIABLE COST
2.       FIXED EXPENSES REMAIN CONSTANT IN AGGREGATE AMOUNT AND DOES NOT VARY WITH INCREASE OR DECREASE IN PRODUCTION UPTO A PARTICULAR LEVEL OF OUTPUT.
3.       FIXED COST PER UNIT VARY
4.       VARIABLE COST INCREASE OR DECREASE IN PROPORTION TO INCREASE OR DECREASE THE OUTPUT AND REMAIN CONSTANT PER UNIT
5.       A SPECIAL TECHNIQUE KNOWN AS MARGINAL COSTING HAS BEEN DEVELOPED WHICH EXCLUDES FIXED OVERHEAD ENTIRELY FROM THE COST OF PRODUCTION AND GIVES US A SAME COST PER UNIT UPTO A PARTICULAR LEVEL.

   MARGINAL COST
  1. IT IS THE ADDITIONAL COST OF THE ADDITIONAL UNIT. IN OTHER WORDS, IT IS THE AMOUNT BY WHICH TOTAL COST INCREASES BY PRODUCING ONE ADDITIONAL UNIT. IT IS ALSO THE AMOUNT BY WHICH TOTAL COST DECREASES BY NOT PRODUCING ONE ADDITIONAL UNIT.
  2. MARGINAL COST  MAY ALSO BE DEFINED AS THE VARIABLE COST INCURRED ON A SPECIFIC ACTIVITY. UNIT MAY BE A SINGLE ARTICLE,A BATCH OF ARTICLES OR AN ORDER ETC
  3. FOR EXAMPLE , THE COST OF PRODUCTION OF 1,000 UNIT OF TABLES IS RS 20,000
  4. AND THAT OF 1001 IS 20150
  5. SO THE MARGINAL COST IS 20,150-20,000=RS 150
   MARGINAL COSTING
   IT IS KNOWN AS VARIABLE COSTING. IT IS A TECHNIQUE WHICH IS CONCERNED WITH THE CHANGES IN COSTS AND PROFITS RESULTING FROM CHANGE IN THE VOLUME OF OUTPUT.
   MARGINAL COSTING MAY BE DEFINED AS THE ASCERTAINMENT OF MARGINAL COSTS AND OF THE EFFECT ON PROFIT OF CHANGES IN VOLUME OR TYPE OF OUTPUT BY DIFFERENTIATING BETWEEN FIXED AND VARIABLE COST.
   MARGINAL COSTING HELPS THE MGMT IN UNDERSTANDING THE BEHAVIOUR OF COST
   NOT A DISTINCT METHOD OF ASCERTAINMENT OF COSTS SUCH AS PROCESS OR JOB COSTING
   BUT A TECHNIQUE WHICH VARIABLE COSTS ARE CHARGED TO OPERATIONS /PROCESS LEAVING ALL INDIRECT COSTS TO BE WRITTEN OFF AS AGAINST PROFIT IN THE PERIOD IN WHICH THEY ARISE
   ASSUMPTIONS
1.       ALL ELEMENTS OF COST-PRODUCTION ,ADMIN,SELLING AND DISTRIBUTION ARE SEGREGATED INTO FIXED AND VARIABLE COST.
2.       VARIABLE COST PER UNIT REMAINS THE SAME
3.       FIXED COST CONSTANT FOR THE ENTIRE VOLUME
4.       NO CHANGE IN SELLING PRICE
5.       THE VOLUME OF OUTPUT IS ONLY FACTOR WHICH INFLUENCES THE COST.
   FEATURES OF MARGINAL COSTING
  1. TECHNIQUE OF ANALYSIS AND PRESENTATION OF COSTS WHICH FACILITATES MGMT TAKING VARIOUS DECISIONS
  2. ALL ELEMENTS OF COSTS ARE CLASSIFIED INTO VARIABLE, SEMI VARIABLE AND FIXED COST.
  3. THE MARGINAL COSTS AS REGARDED THE COSTS OF PRODUCT.
  4. FIXED COSTS ARE TREATED AS PERIOD COSTS.
  5. THE SOCK OF FG AND WIP VALUED AT MARGINAL COSTS ONLY.
  6. PRICES ARE DETERMINED ON THE BASIS OF VARIABLE COST ONLY BY ADDING THE CONTRIBUTION WHICH IS THE EXCESS OF SALES OVER MARGINAL COSTS OF SALE.
  7. SALE PRICE IS BASED ON MARGINAL COST PLUS THE CONTRIBUTION.

  8. PROFIT IS CALCULATED BY DEDUCTING MARGINAL COST AND FIXED COST FROM SALE
  9. COST VOLUME PROFIT OR BREAK EVEN IS ONE OF THE INTEGRAL PART OF MARGINAL COSTING

   CALCULATION OF PROFIT UNDER MARGINAL COST
   IN THE MARGINAL COST IT IS ASSUMED THAT THE DIFFERENCE BETWEEN THE AGGREGATE SALE VALUE AND AGGREGATE MARGINAL COST IS KNOWN AS CONTRIBUTION.
   CONTRIBUTION = FIXED COST + PROFIT ( -LOSS)

   ADVANTAGE
                       SIMPLE TO UNDERSTAND AND EASY TO OPERATE
                       THE VALUATION OF CLOSING STOCK IS DONE AT MARGINAL COST
                       VERY USEFUL TECHNIQUE OF PROFIT PLANNING
a)       VALUABLE TECHNIQUE IN DECISION MAKING
b)       FIXATION OF SELLING PRICE
c)        BUY OR MAKE DECISION
d)       PROFITABLE SALES MIX
e)       LIMITING FACTOR
f)        PROFITABLE METHOD OF PRODUCTION

§PROVIDES THE MGMT WITH USEFUL TECHNIQUE LIKE BREAK EVEN OR CVP
§IT HELPS CONTROLLING IN COST BY FOCUSING ON VARIABLE COST WHICH IS CONTROLLABLE
§HELPS IN EVALUATION OF PERFORMANCE OF DIFFERENT DEPARTMENT.DIVISIONS AND PRODUCTS ETC
§FURNISHES A BETTER AND MORE LOGICAL BASIS FOR FIXATION OF SELLING PRICE
§CHANGES IN PER UNIT C SHOWS CHANGES IN EFFICIENCY IN FAR BETTER WAY
   LIMITATIONS
1.       SEGREGATION OF ALL COSTS INTO FIXED AND VARIABLE
2.       POSSIBILITY OF UNDER RECOVERY AND OVER RECOVERY
3.       WRONG ASSUMPTIONS
4.       FAULTY VALUATION OF STOCK
5.       IGNORANCE OF TIME FACTOR. TIME TAKEN FOR THE COMPETITION IS NOT GIVEN PROPER ATTENTION
6.       NOT SUITABLE TO INDUSTRIES WHERE THE VALUE OF WIP IS HIGH IN RELATION TO TURNOVER.
7.       CAN NOT BE APPLIED TO COST PLUS CONTRACT UNLESS A HIGH PERCENTAGE FROM THE MC TO COVER FIXED COST
8.       NOT SUITABLE FOR EXTERNAL REPORTING



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