Marginal Costing
MARGINAL COSTING
Introduction
Even a school-going student knows that profit is a balancing figure of sales over costs, i.e. Sales - Cost = Profit.
This knowledge is not sufficient for management for discharging the functions of planning and control, etc. The cost is further divided according to its behavior, i.e., fixed cost and variable cost. The age-old equation can be written as:
Sales - Cost = Profit or
Sales - (Fixed cost + Variable Cost) = Profit.
The relevance of segregating costs according to variability can be understood by a very simple example of a shoe-maker, whose
Cost data for a particular period is given below:
1. Rent of shop is Rs. 1200 for period under consideration,
2. Selling price per pair is Rs. 55.
3. Input material required for making one pair is Rs. 50.
4. He is producing 1000 pairs during period under consideration.
In this data, only two types of costs are mentioned-rent of shop and cost of input materials. The rent of shop will not change, if he produces more than 1,000 pairs or less than 1,000 pairs. This cost is, therefore, referred to as fixed cost. The cost of input material will change according to the number of pairs produced. This is variable cost.
Thus, both the costs do not have the same behavior. This knowledge about the changes in behavior of costs can yield wonderful results for the shoemaker in decision-making. Based on these changes in behavior of costs, a very effective cost accounting technique emerges. It is known as marginal costing. Marginal Costing is a management technique of dealing with cost data. It is based primarily on the behavioral study of cost.
Absorption costing i.e., the costing technique, which does not recognize the difference between fIxed costs and variable costs does not adequately cater to the needs of management. The statements prepared under absorption costing do elaborately explain past profit, past losses and the costs incurred in past, but these statements do not help
Introduction
Even a school-going student knows that profit is a balancing figure of sales over costs, i.e. Sales - Cost = Profit.
This knowledge is not sufficient for management for discharging the functions of planning and control, etc. The cost is further divided according to its behavior, i.e., fixed cost and variable cost. The age-old equation can be written as:
Sales - Cost = Profit or
Sales - (Fixed cost + Variable Cost) = Profit.
The relevance of segregating costs according to variability can be understood by a very simple example of a shoe-maker, whose
Cost data for a particular period is given below:
1. Rent of shop is Rs. 1200 for period under consideration,
2. Selling price per pair is Rs. 55.
3. Input material required for making one pair is Rs. 50.
4. He is producing 1000 pairs during period under consideration.
In this data, only two types of costs are mentioned-rent of shop and cost of input materials. The rent of shop will not change, if he produces more than 1,000 pairs or less than 1,000 pairs. This cost is, therefore, referred to as fixed cost. The cost of input material will change according to the number of pairs produced. This is variable cost.
Thus, both the costs do not have the same behavior. This knowledge about the changes in behavior of costs can yield wonderful results for the shoemaker in decision-making. Based on these changes in behavior of costs, a very effective cost accounting technique emerges. It is known as marginal costing. Marginal Costing is a management technique of dealing with cost data. It is based primarily on the behavioral study of cost.
Absorption costing i.e., the costing technique, which does not recognize the difference between fIxed costs and variable costs does not adequately cater to the needs of management. The statements prepared under absorption costing do elaborately explain past profit, past losses and the costs incurred in past, but these statements do not help