Sam (-) (181 Points)
24 October 2012i know fixed OHS are treated as period cost.....we don't charge them to the product cost...etc...i know all that
I want to know the why is Marginal costing done....
What is the significance ..
Is it just a method of calculation or is there any reason to it
If you understand what i am saying.plz help
thank you!
Use easy language
Giridhar S Karandikar
(Team Lead)
(7548 Points)
Replied 24 October 2012
Marginal Costing is preferred to know the increase in marginal cost of the product even if the product cost is increased by one unit. Say if the quantity material requried to produce product A is 100 units @ 50/unit. Now say if the cost increases by 1Re then this will indicate the marginal increase in the cost of raw materials to produce product A.
MArginal costing is of utmost importance in case of large organization wehre the volume is large & even an increase in the cost of material by Re1 will make a singnicant impact on the cost of producing the product.
In case of absorption costing this purpose can't be acheived, hence Marginal Costing is considered as an important tool for management.
Devadas K S
(One life one Dream)
(3525 Points)
Replied 24 October 2012
Marginal Costing is a method which is used to make decisions based on Marginal Cost statements...
Decision Making is the purpose of Marginal Costing...
Decisions such as, determination of good production mix, sales mix, dropping non-profit products, product line decisions...
Using Marginal Costing statements, various products are compared and decision will be taken
Back in the Game
(a)
(1273 Points)
Replied 24 October 2012
Lets think u ve started a business and ve facory inn which u produce a product.
Mr A comes to you asks for something Called as estimated cost or Quoted cost.
u just cannot compute it..wat will u do.
ull call ur purchase manager for Material cost.
Production manager for labour cost..
overheads wat u gonna do...say u ve spent 1Lks for machinery...but u got to say,the estimmated product cost to ur customer per unit...Can u charge entire 1L to him ,no u cant!..
so estimate how many units u can produce in the year say 10000...
deprecaition cost of the machinery say lifee is 5 years..so 20000 per year...
thus ur estimated overhead cost per unit 20000/10000=2 p u.
From the details u quote the cost to MR A,say (Matl cost + labour Cost + oh cost) + prft esmtd=10
This is wat is called as "Standard cost",Further there may be varinace....in life u might estimated many thigns ,have they come perfectly allrite..No!..this gives birth to Standard costing & Variance Analyssis...i mean actuallyy when u produce the product & sell to mr A...it may not be perfectly as estimatedd..thus u analyse wat went wrong and there for variance analysis...there fore out of the report wat u generate ,u control cost..so that u don repeat the mistakes wat u have done....
The above was Costing ,Called as standard costing..
So Wat the heck is marginal costing....
This is a tool for decision making...
u count only variable cost...
Now wat does that mean...
take above Example of Mr A...
think Matl cost from purchase mgr= 3 p u
Labour cost production mgr = 2 p u
this is ur variable cost, isnt it? there for marginal cost....
ohs cost of 1 lacs simply forget...For time being...
i told u Marginal costing is for decision making...
ill elaborate how...
u knw ur varibale cost is 3+2=5 pu
then u ve spent for machinery 1L...
as decided in standard cost above ,u quoted a price of 10 p u to customer MR A.....
u simply wanna knw how many units u got to sell ,at which u lll break even...
So ur VC=5
SP=10
Forget abt the Fixed overhead cost which is 1laks as of now...
just think VC is ur exp i e 5 p.u...
so if sell one unit to MR A...the money which remains with u is 5...Every one unit ull make 5 Rs...
call it contribution as of now...
with this 5 rs which has remained with ,u got to recover something...
Now wats tat,obvously ur machinery cost=1Lakhs....
So many units u got to sell ,to recover ur 1 lakhs..which u ve invested,after which the entire 5 rs p.u. which u recieve is ur PROFIT....
Every unit u sell ull get 5 rs...so u got to sell 20000 rs...to recover ur 1 lk rs,after which mam...
u gonna enjoy pft...
lessons to be learnt...
u got to learn before u actually sold goods ,tat u got to sell 20000 units to break even...
now Doesnt tat ,help for decision making....it does,u cant deny it...
therefore proved tat Marginal costing is a tool of decision making...
And Am exhausted..
Enjoy....
CAclubindia
