Page 257 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 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 ΔC 10
Marginal Cost = = = = 10
Change (Increase) in the Level of Production ΔU 1

Why marginal cost is called as incremental cost?

From the above example, it is obviously understood that marginal cost is nothing but a cost
which incorporates the incremental changes in the cost of production due to either an increase or
decrease in the level of production by one unit, meant as incremental cost.

Why marginal cost is called in other words as variable cost?

From the following classifications of cost, the inter twined relationship in between the variable
cost and marginal cost is explained as below:
Table 12.1: Statement of Fixed, Variable and Total Costs and per Unit

S.No. Units Fixed Fixed Variable Variable Cost Marginal Cost Total
Cost Cost per Cost ( ) per unit ( ) ( ) C/ U Cost
( ) unit ( )
( )
1. 1 500 500 10 10 10 510
2. 50 500 100 500 10 10 1000
3. 100 500 5 1000 10 10 1500
4. 150 500 3.333 1500 10 10 2000

Fixed Cost: It is a cost remains constant or fixed irrespective level of production.

Example: Rent 500 is to be paid irrespective level of production. It remains constant/
fixed irrespective of changes taken place on the level of production.

Figure 12.1
Y’

Total Fixed Cost Line

Fixed Cost per unit Line

X’

X’- Units Y’- Cost in Rupees
Variable cost: It is a cost, which varies with level of production.

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