Marginal Costing

[Md. Al-Amin]

Marginal Costing

Introduction: Marginal Costing is a technique which also divides costs into two categories, but of somewhat different nature. In this case costs are identified as being either fixed or variable, relative to the quantity of output:

Total Cost    =    Variable Costs   +   Fixed Costs

 Marginal Costing – Definition:

Marginal costing distinguishes between fixed and variable costs as conventionally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads. Marginal costing is formally defined as:

       “ The accounting system in which variable cots are charged to cost units and fixed costs of period are written off in full against the aggregate contribution. Its special value is in recognizing cost behaviour and hence assisting in decision-making. “

The term ‘contribution’ mentioned in the definition is the term given to the difference between Sales and Marginal Cost. Thus

Marginal Cost   =   Variable Cost    =    Direct Labour

                                                                                       +

                                                                          Direct Material

                                                                                       +

                                                                         Direct Expenses

                                                                                       +

                                                                      Variable Overheads

Contribution    =    Sales   -    Marginal Cost

The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context.

Ø      Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing;

Ø      In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred;

Ø      Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs.

Ø      The marginal cost statement is the basic document/format to capture the marginal costs.

Note:

Alternative names for marginal costing are the contribution approach and direct costing.
http://crownyou.hubpages.com/hub/Marginal-Costing

[munna99185]

In economics and finance, marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good.[1] In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. For example, if producing additional vehicles requires building a new factory, the marginal cost of the extra vehicles includes the cost of the new factory. In practice, this analysis is segregated into short and long-run cases, so that over the longest run, all costs become marginal. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are considered fixed.
If the good being produced is infinitely divisible, so the size of a marginal cost will change with volume, as a non-linear and non-proportional cost function includes the following:
•   variable terms dependent to volume,
•   constant terms independent to volume and occurring with the respective lot size,
•   jump fix cost increase or decrease dependent to steps of volume increase.
In practice the above definition of marginal cost as the change in total cost as a result of an increase in output of one unit is inconsistent with the differential definition of marginal cost for virtually all non-linear functions. This is as the definition finds the tangent to the total cost curve at the point q which assumes that costs increase at the same rate as they were at q. A new definition may be useful for marginal unit cost (MUC) using the current definition of the change in total cost as a result of an increase of one unit of output defined as: TC(q+1)-TC(q) and re-defining marginal cost to be the change in total as a result of an infinitesimally small increase in q which is consistent with its use in economic literature and can be calculated differentially.
[source: www.wikipedia.com]

Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University

[sajib]

Marginal Costing:


Marginal cost is the cost of the next unit or one additional unit of volume or output.

To illustrate marginal cost let's assume that the total cost of producing 10,000 units is $50,000. If you produce a total of 10,001 units the total cost is $50,002. That would mean the marginal cost---the cost of producing the next unit---was $2.

The reason that the marginal cost was $2 instead of the previous average cost of $5 ($50,000 divided by 10,000 units) is that some costs did not increase when the additional unit was produced. For example, fixed costs such as salaries, depreciation, property taxes generally do not increase when one additional unit is produced.