That can be determined by: - Increase in Fixed Cost Contribution per unit Other Applications Cost Volume Profit Relationship Cost volume profit analysis is a simple but powerful tool for planning of profits and therefore of commercial operations. Ø Ignorance of Time Factor: Since the time factor is completely ignored; comparison ofperformance between two periods on the basis of contribution alone will give the misleadingresults. O P techniques like linear programming, queuing theory, decision theory, etc. So the production will be carried out until the marginal cost is equal to the sale price. Revaluation Accounting: Revaluation or replacement value accounting is mainly concerned with ensuring that capital is maintained in real terms and profit is calculated on this basis. If the marginal cost is higher than the price, it would not be profitable to produce it. Marginal cost of production includes all of the costs that vary with the level of production.
Therefore, they are not capable of explaining their use to the management. Ineffectiveness and inefficiency of marginal costing technique in day to day running of the business. Meaning of Uniform Costing : To meet the specific requirements of different industries, different types of costing principles and practices are used. It also assists in the standardisation of operations and performance. However, the following areas may rightly be pointed out as lying within the scope of management accounting. Methods of remunerating the workers. Marginal costing technique is very easy to understand and operate.
The managerial decision-making is based on this figure. However, the variable selling and distribution overheads are not included in the valuation of inventory. Itis not useful in fixing the responsibility for incurrence of costs. In this situation, increasing production volume causes marginal costs to go down. The data were analysed with percentages while the tests and analysis of the research hypothesis were done using chi-square statistical technique.
Another possibility is that there is danger of too many sales being affected at marginal cost, resulting in denial to the business of inadequate profits. All elements of cost—production, administration and selling and distribution—can be segregated into fixed and variable components. The current year closing stock is the opening stock of next year. In the long term and sometimes in the short term fixed costs do change and accordingly, the differential costs must include any changes in the amount of fixed cost. Further, absorption costing is dependent on the levels of output which may vary from period toperiod, and consequently cost per unit changes due to the existence of fixed overhead.
Wages paid to trainee or apprentices does not comes under category of direct labor as they have no significant value. Normal costs arise during routine day-to-day business operations. Under marginal costing, the fixed costs remain constant and variable costs are varying according to level of output. It is realistic to the value of closingstock items as this is a directly attributable cost. This means that in any organization, numerous cost units may be used for particular parts of the organization or for different purposes.
Selling prices do not remain constant forever and for all levels of output due to competition, discounts for bulk orders, changes in the general price level, etc. Marginal Costing Approach The difference between product costs and period costs forms a basis for marginal costing technique, wherein only variable cost is considered as the product cost while the fixed cost is deemed as a period cost, which incurs during the period, irrespective of the level of activity. New York: Ronald Press, 1919. It considers fixed manufacturingoverhead as product cost which increase the cost of output. Some of the decision-making problems that can be solved by marginal costing are: a Profit planning b Pricing of products c Make or buy decisions d Product mix etc.
Inability of the management to reach an effective decision making as a result of using marginal costing technique other than absorption costing technique. The techniques of costing, therefore, is never static nor are its rules fixed for all time. Ho: Marginal decisions are positively affected by marginal costing techniques. To show forth the accuracy and fair treatment of product cost. In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the of producing one more unit of a good. The value of closing stock is small under marginal costing because only variable costs are considered for valuation. All elements of cost—production, administration and selling and distribution are classified into variable and fixed components.
Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. Here we also discuss the marginal costing and absorption costing differences with examples, infographics, and comparison table. This process is the day to routine of ascertaining costs, whatever the costs ascertained may be and by whatever means these costs are determined. Inability to recognize fixed cost production using marginal costing technique. The areas of application of marginal costing would be discussed in this chapter. Definition of the various elements of costs.
Decision making concerned with future and involves choice between alternatives. If so, a portion of fixed cost is carried forward to the next year. Thus, pricing decisions cannot be based on marginal cost alone. Management can take quality decision with the help of contribution details 6. This may be necessary if comparison of the performance of cost centres is to be made. Ø Avoids Semi-Variable Costs: Semi-Variable costs are not considered in the analysis. It also furnishes information to the government to get subsidy and other concessions.
The disclosure of this factcannot be done by marginal costing. Product Differentiation: When there is difference in products to be produced because of difference in the quality of finished product or raw materials or change in the material mix though the size, type and nature of the business is the same, the costing problems and procedures will also differ because of application of different methods and principles of cost accounting. Moreover, for similar operations different types of machines can be used. If an increase in output is more than one, the total increase in cost divided by the total increasein output will give the average marginal cost per unit. It shows the relative contributions to profit that are made by each of a number of products and show where the sales effort should be contracted.