Page 224 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 11: Marginal Costing and Profi t Planning

The following are the various components of variable cost: Notes

1. Direct Materials: Materials cost consumed for the production of goods.
2. Direct Labour: Wages paid to the labourers who directly involved in the production of
goods.
3. Direct Expenses: Other expenses directly involved in the production stream.

4. Variable portion of Overheads: Generally the overheads can be classified into two categories,
viz. Variable overheads and Fixed overheads.
The variable overhead is the cost involved in the procurement of indirect materials, indirect
labour and indirect expenses.
Indirect Material – Cost of fuel, oil and so on
Indirect Labour – Wages paid to workers for maintenance of the fi rm.
From the Table 11.1 the marginal cost is equivalent to the variable cost per unit of the various

levels of production. The fixed cost of ` 500 is the cost remains the same at not only irrespective
levels of production but also already absorbed at the initial level of production. The initial
absorption of fixed overhead led the marginal cost to become as variable cost.

Semi-variable cost: Another major classification is semi variable/fixed cost which is a cost
partly fixed/variable to the certain level of production or consumption, e.g. Electricity charges,

telephone charges and so on.
It jointly discards the importance of the fixed cost and the semi- variable cost for analysis while

ascertaining the marginal cost.

Marginal Costing is defined as “the ascertainment of marginal cost and of the effect on profi t of

changes in volume or type of output by differentiating between fixed and variable costs.”
!
Caution In marginal costing, the change in the level of cost of operation is equivalent to

variable cost due to fixed cost component which is fixed irrespective level of outputs.

Example: The following figures are extracted from the books of KSBS Ltd. Find out profi t
by using marginal costing and absorption costing. Is there any variations in the results obtained
under the two methods is given below?
The basic production data are:

Normal volume of production = 19,500 units per period
Sale price – ` 4 per unit
Variable cost – ` 2 per unit
Fixed cost – ` 1 per unit
Total fixed cost = ` 19,500 (` 1 × 19,500 units, normal)

Selling and distribution costs have been omitted. The opening and closing stocks consist of both

finished gods and equivalent units of work-in-progress.

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