Page 249 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 12.6 Summary

Marginal costing technique helps in determining the most profitable relationship between
costs, prices and volume of business.
Following are the important areas of decision-making or applications of marginal costing:

Fixation of Price,
Decision to Make or Buy,

Selection of a Profitable Product Mix,
Decision to Accept a Bulk Order,

Closure of a Department or Discontinuing a Product,
Maintaining a Desired Level of Profi t, and
Evaluation of Performance

12.7 Keywords

Decision-making: Decision-making describes the process by which a course of action is selected
as the way to deal with a specifi c problem.

Desired Profi t: It is a profit level desired by the firm to earn at the given level of sales volume.

Fixed Cost: It is a cost which is fixed or remains the same for irrespective level of production.

Key Factor: Factor of influence on the component of contribution.
Marginal Cost: Change occurred in the cost of operations due to change in the level of production.
12.8 Review Questions

1. A refrigerator manufacturer purchases a certain component @ ` 50 per unit. If he manufactures
the same product he has to incur a fi xed cost of ` 20,000 and variable cost per unit is ` 40
when can the manufacturer make on his own or when he can buy from outside?

When the requirements is ` 5,000 units, will you advise to make or buy?
2. From the following data, which product would you recommend to be manufactured in a
factory, time being the key factor?

Particulars Per unit of Product A (`) Per unit of Product B (`)
Direct Material 24 14
Direct Labour @ ` 1per hr 2 3
Variable overhead ` 2 per hr 4 6
Selling price 100 110
Standard time to produce 2 Hours 3 Hours
3. The following particulars are obtained from costing records of a factory:

Particulars Per unit of Product A (`) Per unit of Product B (`)
Direct Material ` 20 per Kg 80 320
Direct Labor @ ` 10 per hr 100 200
Variable overhead 40 80
Selling price 400 1,000
Total fi xed overheads ` 30,000

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