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It is a technique of decision making By differentiating fixed and variable costs, it tries to ascertain effect on profit of change in volume or type of output All the costs are segregated into fixed and variable components Only the variable costs (termed as marginal costs) are regarded as product costs and are used to value inventories and cost of goods sold

It is a technique used in preparation of ad-hoc information in which only cost and income differences between two alternatives are taken into consideration. So a comparison between the costs and revenues under different situations is made and an alternative is selected only in a case where it is most beneficial.

Absorption costing is a total cost technique under which total cost (i.e. fixed cost as well as variable cost) is charged as production cost. In other words, in absorption costing, all manufacturing costs are absorbed on the basis of a predetermined overhead rate based on normal capacity. Absorption costing is the conventional technique of matching costs with revenues. In this technique all costs are divided into three parts (1) Manufacturing or Factory Cost (2) Selling Costs and (3) General Administration costs.

Marginal Costing is a technique of analysing the changes of cost due to the changes in volume of production. The total cost of production may be classified into fixed cost and variable cost. Fixed cost remain constant upto certain level of production. The variable cost changes due to the changes in volume of

The variable cost is otherwise called as marginal cost.

Meaning of Marginal Cost

The Institute of Cost and Management Accountants, London defines marginal cost as the amount of a given volume of output

by which aggregate costs are changed if the volume of output is

increased by one unit. Blocker and Weltmere define, Marginal cost is the increase or

decrease in total cost which results from producing or selling

additional or fewer units of a product or from a change in the method of production or distribution such as the one of improved

machinery, addition or exclusion of a product or selection of an

additional sales channel.

MARGINAL COSTING The ICMA, London defined Marginal Costing as The ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating between fixed cost and variable cost. Characteristics of Marginal Costing 1. The total cost of production is classified into fixed and variable cost. 2. It is a technique of costing which helps the management to take various managerial decisions. 3. The stock of finished goods and work-in-progress are valued at marginal cost. 4. The price of the product is determined on the basis of contribution.

Advantages of Marginal Costing

1. It is simple to operate and easy to understand 2. It helps the management to take various managerial decisions 3. It facilitates to fix the prices 4. Marginal costing technique can be applied for profit planning. 5. It facilitates for taking decision regarding the acceptance or rejection of a bulk order. 6. Marginal costing helps the management to calculate the Break-Even point 7. It facilitates the management to decide the optimum product mix, when the company is producing more than one product

Limitations of Marginal Costing

1. Changes in the selling price affects the results of marginal costing. 2. The assumption that the fixed cost remain constant may not be always correct, since it may also vary due to various reasons. 3. Marginal costing technique excludes fixed cost for various managerial decisions. 4. The assumption that the variable cost per unit remains constant is practically not possible always. Increase in volume of production may reduce the variable cost per unit. 5. Marginal costing technique considers only the value of contribution for deciding the profitability of a product. It ignores the time factor. Product which gives maximum contribution is the best product compared to other, irrespective of the duration of production.

Applications of Marginal Costing

Some important decisions where marginal costing technique is applied are: (i) Production activities, (ii) make or buy, (iii) change of product mix, (iv) pricing and determination of shut-down point and (v) Acceptance of special order.