Page 222 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 11: Marginal Costing and Profi t Planning

2. Absorption costing is dependent on the levels of output which may vary from period to Notes
period, and consequently cost per unit changes due to the existence of fi xed overhead.

Unless fixed overhead rate is based on normal capacity, such changed costs are not helpful
for the purposes of comparison and control.
3. The cost to produce an extra unit is variable production cost. It is realistic to the value of
closing stock items as this is a directly attributable cost. The size of total contribution varies
directly with sales volume at a constant rate per unit. For the decision-making purpose of
management, better information about expected profit is obtained from the use of variable

costs and contribution approach in the accounting system.

Self Assessment

Fill in the blanks:
1. Absorption costing technique is also known by other names as “Full costing” or ………….
2. According to author, the absorption costing tells as to how much ……………… is absorbed
besides the variable cost by each product manufactured.

11.2 Marginal Costing

According to ICMA, London, “Marginal cost is the amount at any given volume of output, by
which aggregate costs are charged, if the volume of output is increased or decreased by one unit.”

Marginal cost is the cost nothing but a change occurred in the total cost due to changes taken
place on the level of production i.e either an increase/decrease by one unit of product.

Example: The firm XYZ Ltd. incurs ` 1000 for the production of 100 units at one level of

operation. By increasing only one unit of product i.e. 101 units, the firm’s total cost of production

amounted ` 1010.

Total cost of production at first instance (C’) = `1000
Total cost of production at second instance (C”) = `1010
Total number of units during the first instance (U’) = 100

Total number of units during the second instance (U”) = 101

Increase in the level of production and Cost of production:
Change in the level of production in units = U”-U’= ΔU
Change in the total cost of production = C” – C’= ΔC
Change (Increase) in the Total Cost of Production Δ C ` 10
Marginal Cost = = = = ` 10
Change (Increase) in the Level of Production Δ U 1

If the same firm reduces the total volume from 100 units to 99 units, the total cost of production
` 990/-
Decrease in the level of production and cost of production:
Change (Increase) in the Total Cost of Production Δ C ` 10
Marginal Cost = = = = ` 10
Change (Increase) in the Level of Production Δ U 1

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