Show related SlideShares at end. WordPress Shortcode. Share Email. Top clipped slide. Download Now Download Download to read offline. Marginal costing and break even analysis Aug. Syed Mahmood Ali Follow. Ratio analysis advantages and limitations Complete Chapter. Ratio analysis advantages and limitations. Introduction to cost accounting. Related Books Free with a 30 day trial from Scribd. Dry: A Memoir Augusten Burroughs. Related Audiobooks Free with a 30 day trial from Scribd.
Marginal costing and break even analysis 1. Features Of Marginal Costing 3. This technique is used to ascertain the marginal cost and to know the impact of variable costs on the volume of output. All costs are classified on the basis of variability into fixed cost and variable cost. Semi-variable costs are segregated into fixed and variable costs.
Marginal i. Fixed costs are charged to Costing Profit and Loss Account of the period in which they are incurred. Stock of finished goods and work-in-progress are valued on the basis of marginal costs. Selling price is based on marginal cost plus contribution.
Profit is calculated in the usual manner. When marginal cost is deducted from sales it gives rise to contribution. When fixed cost is deducted from contribution it results in profit. Break-even analysis and cost-volume profit analysis are integral parts of this technique.
The relative profitability of products or departments is based on the contribution made available by each department or product. Advantages of Marginal Costing 5. The technique is simple to understand and easy to operate because it avoids the complexities of apportionment of fixed costs which, is really, arbitrary.
As such cost and profit are not vitiated. Cost comparisons become more meaningful. The technique provides useful data for managerial decision-making. There is no problem of over or under-absorption of overheads. The impact of profit on sales fluctuations are clearly shown under marginal costing.
The technique can be used along with other techniques such as budgetary control and standard costing. It establishes a clear relationship between cost, sales and volume of output and breakeven analysis. It shows the relative contributions to profit which are made by each of a number of products, and shows where the sales effort should be concentrated.
Stock of finished goods and work-in-progress are valued at marginal cost, which is uniform. Limitations of Marginal Costing 7.
Segregation of costs into fixed and variable elements involves considerable technical difficulty. The linear relationship between output and variable costs may not be true at different levels of activity. In reality, neither the fixed costs remain constant nor do the variable costs vary in proportion to the level of activity.
The value of stock cannot be accepted by taxation authorities since it deflates profit. This technique cannot be applied in the case of contract costing where the value of work-in- progress will always be high.
This technique also cannot be used in the case of cost plus contracts unless fixed costs and profits are considered. Pricing decisions cannot be based on contribution alone.
The elimination of fixed costs renders cost comparison of jobs difficult. The distinction between fixed and variable costs holds good only in the short run. In the long run, however, all costs are variable. With the increased use of automatic machinery, the proportion of fixed costs increases. A system which ignores fixed costs is, therefore, less effective. The technique need not be considered to be unique from the point of cost control.
Break-Even Point 9. Break-even point represents that volume of production where total costs equal to total sales revenue resulting into a no-profit no-loss situation. If output of any product falls below that point there is loss; and if output exceeds that point there is profit.
Thus, it is the minimum point of production where total costs are recovered. Assumptions Underlying Break-Even Analysis All costs can be separated into fixed and variable components, 2. Fixed costs will remain constant at all volumes of output, 3. Variable costs will fluctuate in direct proportion to volume of output, 4. Selling price will remain constant, 5. Product-mix will remain unchanged, 6.
The number of units of sales will coincide with the units produced so that there is no opening or closing stock, 7. Editors' Picks All magazines. Explore Podcasts All podcasts. Difficulty Beginner Intermediate Advanced. Explore Documents. Marginal Costing. Uploaded by Rucha. Document Information click to expand document information Description: Marginal Costing. Original Title Marginal Costing. Did you find this document useful? Is this content inappropriate? Report this Document.
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