Page 92 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING
P. 92

Unit 6: Marginal Costing and Absorption Costing




          Indirect Material – cost of fuel, oil and so on                                       Notes

          Indirect Labour: Wages paid to workers for maintenance of the fi rm.
          From the Table 6.1 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.”

          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.

          Self Assessment

          Fill in the blanks:
          1.   ...................... is the cost nothing but a change occurred in the total cost due to changes taken
               place on the level of production.
          2.   The ...................... is the cost involved in the procurement of indirect materials, indirect
               labour and indirect expenses.
          3.   The initial absorption of ...................... led the marginal cost to become as variable cost.

          6.2 Contribution




          The costs are classified into two categories viz. fixed and variable cost. Variable cost per unit is
          considered as marginal cost of the product. Fixed costs are charged against contribution of the
          transaction. Selling price of the product = marginal cost + contribution.
                                             Figure 6.3


                                         Contribution


                   Method of Difference                     Method of Meeting
                    Sales - Variable Cost                   Fixed cost + Profit


          Marginal costing profitability statement as follows:
          Sales                                             xxxx
          Variable Cost                                     xxxx
          Contribution                                      xxxx
          Fixed Cost                                        xxxx
          Profi t                                            xxxx




                                           LOVELY PROFESSIONAL UNIVERSITY                                    87
   87   88   89   90   91   92   93   94   95   96   97