Monday, June 20, 2011

Marginal costing


Marginal costing: The technique of Marginal Costing is a definite improvement over the technique of Absorption Costing. According to this technique, only the variable costs are considered in calculating the cost of the product, while fixed costs are charged against the revenue of the period. The revenue arising from the excess of sales over variable costs is technically known as Contribution under Marginal Costing.
The following example will help you in understanding the technique.

Example (i) :   From the following data, Let us prepare a statement of cost and profit according to Marginal Costing Technique.

Statement of Cost and Profit
(According to Marginal Costing Technique)


Product A
Product B
Product C

Per Unit
Total
Per unit
Total
Per unit
Total

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Direct Material
3
3,000
4
4,000
5
5,000
Direct Labour
2
2,000
3
3,000
4
4,000
Variable overheads
1
1,000
1
1,000
1
1,000
Total marginal cost
6
6,000
8
8,000
10
10,000
Contribution
4
4,000
7
7,000
10
10,000
Selling price
10
10,000
15
15,000
20
20,000

Thus, the total contribution from the three products A, B and C is Rs. 21,000. The profit will now be computed as follows:

Total Contribution:                                                               Rs. 21,000
Fixed costs:                                                                          Rs.   9,000
                                                                                                --------------
Profit                                                                                       Rs. 12,000
                                                                                                ---------------
Example (ii): Let us prepare the statement profit or loss account for the following data by using Marginal costing technique.

Profit loss account for first year
               

Rs.

Rs.
Direct Material
A
B
C

Direct Labour
A
B
C

Variable
Fixed overheads

3,000
4,000
5,000      12,000


2,000
3,000
4,000       9,000
-----------------------------
                3,000
                9,000
Sales
Closing stock
Loss
--
24,000
9,000

               33,000

33,000

Profit loss account for second year

                                                                Rs.                                                          Rs.

                Opening stock                      24,000                   Sales
                Fixed overheads                    9,000                    A                              10,000
                                                                                                B                             15,000
                Profit                                       12,000                   C                             20,000                   45,000
                                                                ---------                                                    --------                     ---------
                                                                45,000                                                                                   45,000
The above statement shows that the company suffers a loss of Rs. 9,000 in the first year because of non-recovery of fixed overheads, while in the second year it makes a profit of Rs. 12,000. It may be seen from the two years ` Profit and Loss Accounts that the fixed cost of one year has not been carried forward to the next year, Thus, the profit and Loss Account gives a correct picture. 

2 comments:

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Riya R said...

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updated till june 2011