Page 247 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes

Example: If company X needs a machinery for a specific project and after that project
there is no use of the machinery then company can decide to hire the machinery for that project.

A company has its own trucks for transporting raw materials and finished products from one
place to another. It seeks to replace these trucks by keeping public carriers. In making this
decision, of course, the depreciation of the trucks is not to be considered but the management
should take into account the present expenditure on fuel, salary to drive and maintenance.

Self Assessment

Fill in the blanks:
7. Marginal costing helps in taking the decisions regarding the ………………

8. Marginal costing helps to take the decisions for owning the capital asset or ………………
the asset.

12.5 Shut Down or Continue

As discussed earlier, marginal costing technique helps in deciding the profitability of a product.
It provides the information in a manner that tells us how much each product contributes towards
fixed cost and profit; the product or department that gives least contribution should be discarded

except for a short period. If the management is to choose some product out of the given ones,
then the products giving the highest contribution should be chosen and those giving the least
should be discontinued.

Example: A company manufactures three products X, Y and Z. It has prepared the
following budget for the year 2003:
Total Product X Product Y Product Z
Sales 4,20,000 80,000 2,50,000 90,000
Factory Cost
Variable 2,90,500 40,000 1,74,000 76,500
Fixed 29,500 5,000 16,000 8,000
Production Cost 3,20,000 45,000 1,90,000 85,000
Selling and Administration Cost
Variable 35,000 14,000 14,000 7,000
Fixed 8,000 3,500 3,200 1,300
Total Cost 3,63,000 62,500 2,07,200 93,300

Profit 57,000 17,500 42,800 – 3,300 (loss)
On the basis of above information, we understand that the company management is thinking
to discontinue with the production of product Z which has shown loss. The management seeks

your expert opinion on the issue before they take a final decision. You are required to comment
on the relative profitability of the products.

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