... MARGINAL COSTING Introduction: MARGINAL COST: Marginal Cost is the additional cost of producing an additional unit of product. In simple, marginal cost is the extra cost of an extra unit of production. It is the total of all variable costs. It composed of all direct costs and variable costs. The CIMA, London, defines marginal cost “as the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit”. In other words, it is the cost of one unit of product which would be avoided if that unit were not produced. MARGINAL COSTING: It is also known as “VARIABLE COSTING” or “DIRECT COSTING”. The CIMA, London, defines marginal costing as “The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full, against the aggregate contribution. Its special value is in decision making.” Marginal is a technique of costing, in which only variable costs are charged as product costs and included in inventory valuation. Fixed manufacturing costs are not allowed to products. CHARACTERISTICS OF MARGINAL COSTING: 1. Segregation of all costs into fixed and variable elements . 2. Marginal costs (variable costs) as product costs, are only charged to products. 3. Fixed costs as period costs, are charged to costing P &L account. 4. Contribution: is the difference between sales value and marginal cost of sales. 6. Pricing: In marginal costing, Prices...
Words: 1136 - Pages: 5
...MARGINAL COSTING Introduction This paper explores the use of cost accounting information for decision-making purposes. DEFINITION OF KEY TERMS Marginal cost: This is the cost of a unit of a product or service, which would be avoided if that unit or service was not produced or provided Break-even point: This is the volume of sales where there is neither profit nor loss. 1 9 6 COST ACCOUNTING S T U D Y T E X T Margin of safety: This is the excess of sales over the break-even volume in sales. It states the extent to which sales can drop before losses begin to be incurred in a firm Contribution: This is the difference between sales value and the marginal cost of sales. To understand this topic, you need to understand the topic on cost behavior first. Marginal costing is built on cost behavior and terms. Of key importance are product costs, period costs, variable costs and fixed cost. Product costs are costs identified with goods produced or purchased for resale. Such costs are initially identified as part of the value of stock and only become expenses when the stock is sold. In contrast, period costs are costs that are deducted as expenses during the current period without ever being included in the value of stock held. We saw how product costs are absorbed into the cost of units of output. Now we describe marginal costing and compare it with absorption costing. Whereas absorption costing recognizes fixed costs (usually fixed production costs) as part of the...
Words: 2815 - Pages: 12
...for this trading period will not change significantly from those of the previous period, prepare marginal costing statements to show contributions for each department and contribution and profit for the Store overall on the basis of : - All departments remaining in operation: Marginal costing statement / department £000 Store marginal costing statement £000 Furnishing £000 Kitchenware £000 Restaurant £000 Menswear £000 Toys £000 Purchases for resale 400 680 325 229 560 Opening stock 255 63 25,5 27 197 Departemental expenses 21 10 16,5 5 20 Sales promotion costs 14 2 0 1 20 (-) Closing stock 263 53 25 25,5 229,5 TOTAL 427 702 342 236,5 567,5 TOTAL STORE 2275 Contribution/department £000 Store contribution £000 Sales £000 560 980 410 430 680 Total Sales 3060 Marginal costing £000 427 702 342 236,5 567,5 Total Store 2275 TOTAL 133 278 68 193,5 112,5 TOTAL STORE 785 Profit/department £000 Sales 560 980 410 430 680 Marginal costing 427 702 342 236,5 567,5 Non mgt wages 75 45 101 65 95 TOTAL 58 233 -33 128,5 17,5 Profit Store £000 Contribution Store 785 (-) Non mgt wages 381 (-) Other costs 412 Total -8 - The closure of the restaurant department: Marginal costing statement / department £000 Store marginal costing statement £000 Furnishing £000 Kitchenware £000 Menswear £000 Toys £000...
Words: 426 - Pages: 2
...Introduction Financial budgets are itemised summaries of company income and expenses for a given period. It provides a concrete, organised, and easily understood breakdown of how much money a particular company can forecast coming in and how much going out in terms of expenditure. It is an invaluable tool to help prioritise the management of finance. In this report I have been tasked with analysing budgets and making appropriate decisions. Using relevant information from a children’s computer company “KidGenius” I will be explaining the calculations of unit costs and making price decisions. Also using investment appraisal techniques I will be assessing the viability of the project. The second part of this report will be discussing the main financial statements, comparing appropriate formats of financial statements for different types of business, and using ratios extracted from the company’s financial statements I will be comparing and interpreting accounts from two consecutive years. 3.1) Using Information provided sales, production, material usage, material purchases and value budgets have been prepared for the month of January 2012 Sale Budget for January 2012: Sales in quantity and value, including total value Sale Budget | Product A | Product B | Total: | Sales Units | 1000 | 2000 | | Sales Values | 100000 | 240000 | 340000 | The sales values can be found by simply multiplying the number of...
Words: 865 - Pages: 4
...B7AF104 COST MANAGEMENT Assessment Cost Management Assignment (Shopping Limited) Prepared by: Name ID Number DBS150718739 Nur Iza Carmilla Bt Mohd Diah Section 2.4 10333550 NurKarimah Bt Abd Halim DBS150718748 2.4 10333562 Fitriah Bt Sulaiman DBS150719759 10333514 Prepared for: Mr Syed Azlan Aljaffree Bin Syed Khadzil No of words: 1675 words 1 2.4 CONTENTS PAGE 1.0 EXECUTIVE SUMMARY 3 2.0 QUESTION 1 4 3.0 QUESTION 2 5 4.0 QUESTION 3 4.1 QUESTION 3 (a) 7 4.2 QUESTION 3 (b) 8 5.0 QUESTION 4 9 6.0 CONCLUSION 10 7.0 REFERENCE 11 8.0 INDIVIDUAL CONTRIBUTIONS 12 2 Executive Summary Shopping Limited is family-owned and managed, traditional department store situated in a city in the North of England. The store has four retailing departments which is Furnishing, Kitchenware, Menswear, Toy and Restaurant. Each department is managed by a departmental manager and recently Samantha was appointed to the post of departmental manager of the Toy Department, Albert is the departmental manager of Menswear, Joseph is the departmental manager of Kitchenware, Arthur is the departmental manager of Furnishings and Claude is the departmental manager of Restaurant. Albert may be Samantha’s great uncle, who used to be a Sergeant in the Police Force but they often argue because they seldom agree with each other’s opinions. On the other hand, Claude have an explosive...
Words: 2236 - Pages: 9
...MARGINAL OR VARIABLE INCOME STATEMENT Marginal costing statement on per unit basis The direct materials cost, direct labor cost and other variable costs per unit are assumed to remain constant at any level of activity to produce the finished good i.e. Instagrowth hair oil. The fixed cost for the business operation is also constant along with the selling price per unit including both variable and fixed costs of it. The units sold are assumed to be 125,000 on 12 month basis. Following are my assumptions for the finalization of per unit cost after a research on hair growth products. Material (solvents, holding agents and other additives, propellants) cost per unit = $4 Labor cost per unit = $5 Variable manufacturing overhead = $2 Total Variable cost = $ 11 Fixed costs (spread over the complete units being sold under assumption for first 12 months of trading) = $2 Markup = $3 Selling price per unit = $16 The marginal costing statement is shown below. Figure 1 Marginal costing on per unit basis Figure 2 Margin costing on 12-month basis BREAK EVEN ANALYSIS Units sold ($ ‘000) 20 40 60 80 100 120 Costs and Revenue ($ ‘000) 320 640 960 1280 1600 1900 Contribution margin per unit 5 5 5 5 5 5 Fixed costs 250 ...
Words: 1624 - Pages: 7
...Antony | Date issued | Completion date | Submitted on | | 16-09-2012 | 17-09-2012 | Qualification | Unit number and title | BTEC LEVEL 7 EDSML | Unit 13 : Managing Financial Principles and Techniques | | | Assignment title | FORD MOTOR COMPANY – A CASE STUDY | In this assessment you will have opportunities to provide evidence against the following criteria. Indicate the page numbers where the evidence can be found. | Criteria reference | To achieve the criteria the evidence must show that the student is able to: | | Task no. | | Evidence | 1 | explain the importance of costs in the pricing strategy of an organisation changes | | 1.1 | | 9 | 1 | design a costing system for use within an organisation resource | | 1.2 | | 17 | 1 | propose improvements to the costing and pricing systems used by an organisation | | 1.3 | | 21& 24 | 2 | apply forecasting techniques to make cost and revenue decisions in an organisation | | 2.1 | | | 2 | assess the sources of funds available to an organisation for a specific project | | 2.2 | | | 2 | select appropriate budgetary targets for an organisation | | 3.1 | | | 3 | participate in the creation of a master budget for an organisation |...
Words: 3051 - Pages: 13
...Introduction According to Chand (2015), costing techniques are used by management for controlling cost and making managerial decisions. It systematically records expenses and analyses the cost of each product manufactured or service rendered by an organisation (Hariharan, n.d.). Firms choose to adapt to a specific costing theory that caters accordingly to their needs and objectives. Part 1: Evaluation of Costing Theories Costing theories are very important in business decision making. According to Hariharan (n.d.), they serve managers as a guide to make correct decisions such as what price to quote, whether to place order for inputs or whether to abandon or add a product to the production line. Costing theories also determines the price of the best alternative use of a factor of production and results in an efficient allocation of resources (Chand, 2015). The business will adopt the most profitable production inputs by identifying unprofitable activities, losses and inefficiencies (Chand, 2015) Costing theories also helps the decisions regarding the capital expenditure through the estimation of long-run function (Chand, 2015). This function will be useful to managers when deciding on the expansion or contraction of plant size in the firm and confirming that the present plant size is just nice for the output level that is being produced (Chand, 2015). It improves the overall productivity of an organisation and acts as an important guide in bringing prosperity to the firm (Vitez...
Words: 1822 - Pages: 8
...A Discussion on Cost Behavior in Relation to Financial Statements Name Institution Date SLP Interpreting figures presented on the financial statement has always been a hectic task to the public. A trend analysis assists in the evaluation of the financial presentation of a business over a specific period of time. Periods to be analyzed ranges from months, quarterly, half yearly or between specific years depending on the situation. In accounting, two methods are widely adopted to analyze the income statement and balance sheet trends. The techniques adopted are the horizontal analysis or the vertical analysis. The two analyses help the users of financial information to compare the performance of different companies for specified financial years and evaluate the performance of the companies over a certain period. The two analysis techniques are related in that the reported figures in the balance sheet or income statement are converted into percentages (Fridson, 2002). Horizontal analysis focuses on changes on trends in financial statements variables over a certain period. It compares historical financial data over a number of periods. The application of horizontal analysis helps to present the complex data in the financial statements and judge whether specific components have increased or decreased. In horizontal analysis technique, the base year is extracted from the financial statements and the figure of each component under study is converted to a percentage of the base...
Words: 2226 - Pages: 9
...Management Accounting Marginal and absorption costing General: Product cost = Unit cost Page | 1 Production cost CGS Inventory Marginal Cost 1. Unit cost Direct material Direct Labour Direct expenses Variable production overheads 2. CGS = Units sold X unit cost 3. Inventory = units X unit cost (Production units - Sales units) 4. Contribution per unit = Selling price per unit – unit cost – variable non production cost Absorption costing 1. Unit cost Unit cost as per marginal costing Fixed production overheads (OAR per unit) 5. Total contribution = units sold X contribution per unit 5. Total Gross profit = units sold X Gross profit per unit Or Total sales – CGS 6. Profit = total GP ± over/ (under absorption) – Non Production costs 7. Over/ (under absorption) = Absorbed FOH – Actual FOH 6. Profit = Total contribution – Fixed costs 7. Fixed costs = Actual Production FOH + Non production 8. Non production costs Admin + selling + distribution etc. 2. CGS = Units sold X unit cost 3. Inventory = units X unit cost (Production units - Sales units) 4. Gross profit per unit = Selling price per unit – unit cost DIFFERENCE IN PROFIT • • Difference in profit is due to difference in unit cost. You might have noticed that difference is OAR/ unit. In marginal costing fixed production overheads are treated as period cost. Hence not included in inventory valuation and made expense in a period. (Same like non production ...
Words: 271 - Pages: 2
...1. Explain fully how auto manufacturers should choose among substitutable inputs and production processes. Discuss in detail and apply the related concepts According to the textbook, the production process is the process used by an organizations to produce a good. It begins with the production function, which is a descriptive relation that links inputs with output. It (production function) specifies the maximum feasible output that can be produced for given amounts of inputs. Production functions are determined by the available technology and can be expressed mathematically. (Chap. 5, pg. 143) For instance, an automobile supplier is able to use inputs such as steel, aluminum, plastics, and labor into finished goods (auto parts). There the production function is expressed as Q = f (x1, x2, … xn), where Q is the quantity produced and produced and x1, x2, … xn are the various inputs used in the production process. Two aspects of the production process are returns to scale and returns to a factor. Returns to scale is the term that refers to the relation between output and the proportional variation of all taken together. There are three types of returns to scale; constant, increasing, and decreasing. With constant returns to scale, a 1 percent change in all inputs results in a 1 percent change in output. (Chap. 5, pg. 144) In other words, the relationship (change) between input and output is constant. With increasing returns to scale, a 1 percent change in all inputs results...
Words: 2551 - Pages: 11
...ACCOUNTING COSTING AND BUDGETING. HND IN BUSSINESS MANGMENT Indivdual Assigment [Ilzam Ilyas/BM43/09] Executive Summery This report describes Managing accounting costing and budgeting to an organization of both current and future business. Effective information and knowledge can be gained by an organization if they have a clear understanding about their costing and budgeting flow. There are four learning outcomes that have been talked in this report. The learning outcome 1 speaks about the types of costing that organization has to bear and it shows with the relevant examples. It also calculates cost and the price and found the net profit of the given statement using different costing methods. The learning outcome 3 explains the purpose of budgeting advantages and disadvantages and some other types of budgets and calculated the cash budget statement of the company. Further, in learning outcome 2 and 4 of the assignment, the way company “Cosmo” that makes and sell products is clearly described using variance as its method of controlling and coordinating their labors. Moreover, existing approach of Variance by the “Cosmo” organization has highlighted with the recommendation to improve their performance next year with all the calculations process is identified and discussed. Acknowledgment "I would like to thank our Management Accounting Costing and Budgeting...
Words: 3508 - Pages: 15
...Marginal Costing Student’s Name: Marginal Costing Course code and name Instructor’s name Learning Institution City, State Date of submission Marginal Costing PRINCIPLES Economists incline to think about costs in terms of static, timeless models with continuous cost functions. The real context is, however, one of businesses and systems which already exist and have accrued a collection of assets of various vintages whose accounting cost replicates past prices, past situations and arbitrary conventions about devaluation (Collis, 2012). In the applied economics context, such as utility regulation, the textbook theory is of no help Marginal cost Marginal cost is a close estimate of how economic value would change if return changed (Barrios, 2010). Marginal means an initially determined, however in practice, in light of indivisibility in plant sizes, we are often intrigued by the for every unit change in value that will be brought on by a significant change in a future yield, not of a one unit change. Moreover, venture and limit are not continually variable; they are uneven. Marginal costs include determining, since they are the contrasts between what was and what would have been with diverse yields. The result is that, when the idea of marginal cost totally concurs on a basic level, its estimation includes significantly more than computations established upon a set of standards. All gages are liable to mistake, including minimal cost gages. MARGINAL COSTS...
Words: 2313 - Pages: 10
...Direct and indirect Costs The term direct costs mean the costs involved directly in the making of the product or the service. The obvious costs you might include are the raw materials and direct labour. For example if you estimate there is in total £7 of direct materials, and you pay the labour £10 an hour and they finish in half an hour, your direct labour would be £5. So to produce this item in total it will be £5 plus £7 which the total direct cost will be £12. However there would be many more costs involved in the manufacturing process. The cost of power to run the equipment, the rent of the factory, the heat and lighting, the wages of all the staff and managers involved, the depreciation of the machinery and finally the advertising costs and other expenses the firm has to pay these are all indirect costs. Many direct costs will have direct expenses such as the motive power to operate the machinery, packaging costs and VAT. The costs calculated may vary according to the nature of the product. Although the company may use electricity for different purposes there isn’t a fixed cost for making one product so the general electricity will be indirect. The majority of expenses wouldn’t be classed as direct because they can vary in price. When a firm values its stock at the end of the year, in order to complete the final accounts, it will have to estimate three types of stock it holds, raw materials, work in progress and finished goods. The stocktake, to value the closing stock...
Words: 2888 - Pages: 12
...UNIT 2: FINANCE IN THE HOSPITALITY INDUSTRY Get assignment help for this unit at assignmenthelpuk@yahoo.com LO1 Understand sources of funding and income generation for business and services industries Funding: sources eg retained profits, loans, banks, investors, small business schemes, franchise, hire purchase, sponsorship, lease schemes, creditors, debt factoring Income generation: methods eg sales, commission, sub-letting, sponsorship, grants, tracking mechanisms LO2 Understand business in terms of the elements of cost Elements of cost sales; materials; consumables; labour; overheads; capital; gross and net profits; discount costing Selling prices: product and service costing; formula to achieve a specific gross profit percentage; differential gross/net profit margins; marginal costing; effect of competition; freelance; commission; peak/off-peak trading Control of stock and cash: methods eg storage, purchasing, cash, security, reconciliation, stock-taking Taxation: income tax; Value Added Tax (VAT); corporation tax; schedules; rates; personal/capital allowances; post-tax profits, implications LO3 Be able to evaluate business accounts Trial balance: source; structure eg summary of accounts from sales, purchase and nominal ledgers Final accounts: types eg sole trader, partnerships, limited company, trading account, profit and loss account, balance sheet, adjustments for depreciation, accruals, prepayments, bad debt provision; format eg vertical, double-entry,...
Words: 835 - Pages: 4
