Marginal Costing - Basics

Posted Sat, 03/14/2009 - 21:19 by vasu

This article introduces you to Marginal Costing and its basics. The objective of this article is to help you understand the meaning of marginal costing accounting system and the basics of all other costs and their associations.

Table of Contents [hide]

Marginal Costing Definition
Marginal Cost
Marginal Costing
Direct Costing
Contribution
Variable Cost
Fixed Cost
Fixed Expenses
Fixed costs and Fixed expenses
Variable costs and Variable expenses

Marginal Costing Definition

Marginal Costing is an accounting system in which variable costs are charged to units and fixed costs of the period are written in full against aggregate contribution.

Marginal Cost

The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit.

It is the change in total cost that arises when the quantity produced changes by one unit.

Marginal Costing

The ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs.

The cost of an item includes only the variable costs incurred in its production.

Revenue (per product) - Variable Costs (per product) = Contribution (per product)
Total Contribution - Total Fixed Costs = Total Profit or (Total Loss)

It does not attempt to allocate fixed costs in an arbitrary manner to different products.
This method is used particularly for short-term decision-making.
The short-term objective is to maximize contribution per unit.
If constraints exist on resources, then Marginal Cost analysis can be employed to maximize contribution per unit of the constrained resource

Direct Costing

The practice of charging all direct costs to operations, processes or products, leaving all indirect costs to be written-off against profit in the period in which they arise is called Direct Costing.

This differs from marginal costing in that some fixed costs could be considered to be direct costs in appropriate circumstances.

Contribution

Contribution is the difference between the sales and the marginal cost of sales. It contributes towards fixed expenses and profit.

The contribution margin is sales minus variable expenses.

Contribution margin = Sales - Variable Expenses

When the contribution margin is expressed as a percentage of sales it is referred to as the contribution margin ratio.

The contribution margin per unit is the product’s selling price minus its variable costs and expenses.

Variable Cost

Variable Cost is a cost which tends to vary directly with volume of output.

Variable costs are sometimes referred to as direct costs in system of Direct Costing.

Variable Expenses mean the total of the company’s variable costs plus its variable expenses.

Fixed Cost

Fixed Cost is a cost which tends to be unaffected by variations in volume of output. Fixed costs depend mainly on the efflux ion of time and do not vary directly with volume or rate of output.

Fixed costs are sometimes referred to as period costs in system of Direct Costing.

Fixed Expenses

mean the company’s total amount of fixed costs plus its fixed expenses.

Fixed costs and Fixed expenses

Fixed costs and fixed expenses are those which do not change as volume changes.

Variable costs and Variable expenses

Variable costs and variable expenses increase as volume increases and they will decrease when volume decreases.

The relationship of contribution to Sales will remain constant under different levels of sales only if:

Variable cost per unit remains constant.
Fixed costs remain the same.
Selling price per unit does not change.

The cost per unit of an item is important for

Setting the selling price
Valuing stocks
Calculating profitability

see also Applications of Marginal Costing

Categories:
- Marginal Costing
- Management Accounting

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Marginal Costing - Basics

Posted Sat, 03/14/2009 - 21:19 by vasu

Table of Contents [hide]

Marginal Costing Definition
Marginal Cost
Marginal Costing
Direct Costing
Contribution
Variable Cost
Fixed Cost
Fixed Expenses
Fixed costs and Fixed expenses
Variable costs and Variable expenses

Marginal Costing Definition

Marginal Costing is an accounting system in which variable costs are charged to units and fixed costs of the period are written in full against aggregate contribution.

Marginal Cost

The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit.

It is the change in total cost that arises when the quantity produced changes by one unit.

Marginal Costing

The ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs.

The cost of an item includes only the variable costs incurred in its production.

Revenue (per product) - Variable Costs (per product) = Contribution (per product)
Total Contribution - Total Fixed Costs = Total Profit or (Total Loss)

It does not attempt to allocate fixed costs in an arbitrary manner to different products.
This method is used particularly for short-term decision-making.
The short-term objective is to maximize contribution per unit.
If constraints exist on resources, then Marginal Cost analysis can be employed to maximize contribution per unit of the constrained resource

Direct Costing

The practice of charging all direct costs to operations, processes or products, leaving all indirect costs to be written-off against profit in the period in which they arise is called Direct Costing.

This differs from marginal costing in that some fixed costs could be considered to be direct costs in appropriate circumstances.

Contribution

Contribution is the difference between the sales and the marginal cost of sales. It contributes towards fixed expenses and profit.

The contribution margin is sales minus variable expenses.

Contribution margin = Sales - Variable Expenses

When the contribution margin is expressed as a percentage of sales it is referred to as the contribution margin ratio.

The contribution margin per unit is the product’s selling price minus its variable costs and expenses.

Variable Cost

Variable Cost is a cost which tends to vary directly with volume of output.

Variable costs are sometimes referred to as direct costs in system of Direct Costing.

Variable Expenses mean the total of the company’s variable costs plus its variable expenses.

Fixed Cost

Fixed Cost is a cost which tends to be unaffected by variations in volume of output. Fixed costs depend mainly on the efflux ion of time and do not vary directly with volume or rate of output.

Fixed costs are sometimes referred to as period costs in system of Direct Costing.

Fixed Expenses

mean the company’s total amount of fixed costs plus its fixed expenses.

Fixed costs and Fixed expenses

Fixed costs and fixed expenses are those which do not change as volume changes.

Variable costs and Variable expenses

Variable costs and variable expenses increase as volume increases and they will decrease when volume decreases.

The relationship of contribution to Sales will remain constant under different levels of sales only if:

Variable cost per unit remains constant.
Fixed costs remain the same.
Selling price per unit does not change.

The cost per unit of an item is important for

Setting the selling price
Valuing stocks
Calculating profitability

see also Applications of Marginal Costing

Categories:
- Marginal Costing
- Management Accounting

Comments

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by Visitor - 11/13/2009 - 17:25

العاب العاب العاب العاب

by Visitor - 03/03/2010 - 00:06

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Marginal Costing - Basics

Marginal Costing Definition

Marginal Cost

Marginal Costing

Direct Costing

Contribution

Variable Cost

Fixed Cost

Fixed Expenses

Fixed costs and Fixed expenses

Variable costs and Variable expenses

Comments

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Books

Browse Article Categories

User login

Featured Gallery Photo

Hills Valley 1

Active forum topics

Marginal Costing - Basics

Marginal Costing Definition

Marginal Cost

Marginal Costing

Direct Costing

Contribution

Variable Cost

Fixed Cost

Fixed Expenses

Fixed costs and Fixed expenses

Variable costs and Variable expenses

Comments

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