10-07-2012, 12:13 PM
CONCEPT OF MARGINAL COST
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Marginal costing
Basic Concept of Marginal costing
Marginal costing is concerned with determination of product cost which consists of direct material, direct labour, direct expenses and variable overheads.
It should be kept in mind that variable costs per unit are fixed and fixed costs per unit are variable. This method of costing is generally known as marginal costing.
Marginal costing is also known as direct costing, contributory costing and incremental costing.
Meaning of Marginal costing
The ICMA has defined marginal cost “as the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased or decreased by one unit.”
From the analysis of this definition it is clear that increase/decrease in one unit of output increases/reduces the total cost from the existing level to the new level. This increase/decrease in variable cost from existing level to the new level. is called as marginal cost.
Types of cost
Variable cost -
The cost which varies or increase with the level of production are known as variable cost.
Fixed cost –
These are the cost which remains fixed irrespective of level of production.
Semi variable cost-
These are the cost which is neither fixed nor variable they are known as semi variable cost.
e.g. Depreciation on plant and machinery , expenses of delivery van.
Margin of safety
It represents the difference between total sales and BEP sales. It can be expressed in terms of % as well as in value. The size of MOS shows the strength of firm.
MOS = Total Sales – BEP Sales
MOS = Profit
P/V Ratio