Page 63 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes  It will increase if the production increases and will decrease if the production decreases.
 The technique of marginal costing helps in supplying the relevant information to the
management to enable them to take decisions in several areas.

 Marginal Costing has been defined as, ‘Ascertainment of cost and measuring the impact
on profits of the change in the volume of output or type of output. This is subject to one
assumption and that is the fixed cost will remain unchanged irrespective of the change.’
 An important feature of marginal costing is the valuation of inventory is done at variable
cost only. This means, that variable costs only are taken into consideration while valuing
the inventory.
 Fixed costs are eliminated from the inventory valuation because they are largely period
costs and relate to a particular period or year.
 An important application of marginal costing is the area of profit planning.
 Profit planning, generally known as budget or plan of operation may be defined as the
planning of future operations to attain a defined profit goal.

 The marginal costing technique helps to generate data required for profit planning and
decision-making.
 Managerial decision-making is a very crucial function in any organization.

 Decision – making should be on the basis of the relevant information. Through the marginal
costing technique, information about the cost behaviour is made available in the form of
fixed and variable costs.

 The segregation of costs between fixed and variable helps the management in predicting
the cost behaviour in various alternatives.

3.5 Keywords

Absorbed Cost: It includes production cost as well as administrative and other cost.
Absorption Costing: It is a method by which all direct cost and applicable overheads are charged
to products or cost centres for finding out the total cost of production.
Direct Costing: Principles under which all cost which are directly related are charged to products,
process, operations or services.
Key Factor Analysis: The preparation of a plan after taking into consideration the constraints, if
any, on the various resources. These constraints are also known as limiting factors or principal
budget.
Marginal Costing: It is in fact a technique of costing in which only variable manufacturing costs
are considered while determining the cost of goods sold and also for valuation of inventories.

Marginal Costs: These are variable costs consisting of labour and material costs, plus an estimated
portion of fixed costs (such as administration overheads and selling expenses).
Marginal Revenue: It is the additional revenue that will be generated by increasing product
sales by 1 unit.
Profit Planning: Generally known as budget or plan of operation may be defined as the planning
of future operations to attain a defined profit goal.

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