Page 223 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes

Did u know? Why marginal cost is called as incremental cost?
From the above example, it is obviously understood that marginal cost is nothing but a
cost which incorporates the incremental changes in the cost of production due to either an
increase or decrease in the level of production by one unit, meant as incremental cost.
From the following classifi cations of cost, the inter twined relationship in between the variable
cost and marginal cost is explained as below:

Table 11.1: Statement of Fixed, Variable and Total Costs per Unit

S. Units Fixed Fixed Variable Variable Marginal Total
No. Cost Cost Cost Cost Cost Cost
per unit per unit (`)
(`) (`) (`) (`) ∆C/∆U (`)
1. 1 500 500 10 10 10 510
2. 50 500 100 500 10 10 1000
3. 100 500 5 1000 10 10 1500
4. 150 500 3.333 1500 10 10 2000

Fixed Cost: It is a cost remains constant or fixed irrespective level of production.

Example: Rent ` 500 is to be paid irrespective level of production. It remains constant/
fixed irrespective of changes taken place on the level of production.

Variable cost: It is a cost, which varies with level of production.

218 LOVELY PROFESSIONAL UNIVERSITY