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Marginal cost-Introduction
This document discusses different types of costs including fixed costs, variable costs, and semi-variable costs. It defines fixed costs as those that do not vary with output over a short period of time, variable costs as those that change directly with output volume, and semi-variable costs as being partly fixed and partly variable. Marginal costing is then introduced as a technique that analyzes costs and profits based on how they change with increases or decreases in output volume, differentiating between fixed and variable costs. The key assumptions and uses of marginal costing are also summarized.
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Marginal cost-Introduction
- 2.
- 3. TYPES OF COST •Doesnot vary with the volume of output over a short period of time Fixed cost •Changes directly with the volume of output Variable cost •Partly fixed and partly variable Semi-variable or Semi-fixed cost
- 4. Remain fixedover long period of time Does not change with volume of production Treated as period cost High FC, higher break even Insurance, interest expense, property taxes, utilities expenses and depreciation of assets. FIXED COST Fixed cost= Rs.50000 5000 units Rs.10 per phone Fixed cost= Rs.50000 10000 units Rs.5 per phone
- 5. Changes withthe volume of output Cost of raw material, labor, packaging charges etc Reveals the performance of business More production, high VC VARIABLE COST Produces 60 pizza Cost of raw material= Rs. 6000 Produces 40 pizza Cost of raw material= Rs. 4000
- 6. Marginal costing isdefined as, ”the amount of any given volume of output by which aggregate costs are changed if the volume of output is increased by one unit” MARGINAL COST
- 7. Manufactures computer ABC ltd.Manufactures 100 units of computer at Rs. 5,000 each. The total cost of manufacturing 100 units is Rs. 500,000 They decided to produce 1 extra unit. Then the cost of producing 101 units would be Rs. 505,000. Thus , the Marginal cost is Rs. 5,000 i.e., 505000-500000
- 8. The Institute ofCost and Management Accountants, London, defines marginal costing 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” Concerned with changes in cost and profit resulting from changes in volume of output A.k.a. “variable costing” Marginal costing= Change in cost Change in quantity Break-even analysis MARGINAL COSTING
- 9. CHARACTERISTICS OF MARGINAL COSTING Decisionmaking Inventory valuation Linkage of cost and activity Pricing Fixed and Variable Cost Marginal Costing and profit
- 10. Technique of analysisand presentation of costs which helps management in taking many managerial decisions Elements of cost production (administration, distribution, selling) are classified as fixed and variable components Variable cost as the cost of the product Fixed cost period cost Finished goods and work-in-progress are valued at marginal cost Prices are determined on the basis of marginal cost
- 11. ASSUMPTIONS OF MARGINAL COSTING Techniquesof marginal costing are based on the following assumptions : Elements of cost- Variable cost fluctuates directly in proportion to change in the volume of output Selling price per unit may remain unchanged or constant Fixed costs does not change for entire volume of output Volume of production is the only factor which influences the costs FIXED COST VARIABLE COST
- 12. THANK YOU! Presented by: BHARTIGOYAL D. II B.COM [CA]