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Costing

Nirav (Accountant) (595 Points)

26 May 2015

Hello friends, in costing there's a topic in marginal costing named "Cost indifference point". It refers to that level of activity at which total cost i.e. variable + fixed of the given two alternatives is same. The formula to find that point or activity is Difference between total fixed cost of two alternatives divided by difference between variable cost per unit of two alternatives. I want to interpret this formula. I mean how it can be cost indifference point!! Can anyone explain this formula with example or something??

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3 Replies

(Guest)

consider two following example -

1. Alt-1 Alt-2

Variable cost (per unit) 100 200

Fixed cost 250000 300000

now there is no debate about which option to choose because no matter how many units u produce cost in first option will be lower always. so we will choose fst option.

2. Alt-1 Alt-2

Variable cost (per unit) 100 200

Fixed cost 250000 150000

now u have to think upon which option u r going to choose because at some point alt-1 is benefic while at other alt-2, but there is some point of production where both option will have same cost so thats what we call indifference point..

its always in terms of output..

if i say in terms of equation , then F.C.+ V.C. in first option = F.C. + V.C. in second option

as u know we are working out at what level of production where there will be no difference in total cost so u can assume it to be x and it will be same in both alternatives..thereby getting formula of indifference point..

hope it will solve ur confusion...