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Costing
Marginal Costing
The term cost can be viewed from two angles basically.
Direct Cost and Indirect Cost
Fixed Cost and Variable Cost
Marginal Cost
Marginal cost is defined as the amount at
any given volume of output by which
aggregate costs are changed if the
volume of output is increased or
decreased by one unit.
Value Of Marginal
Costing To Management
It integrates with other aspects of management
accounting.
Management can easily assign the costs to
products.
It emphasizes the significance of key factors.
The impact of fixed costs on profits is emphasized.
The profit for a period is not affected by changes
in absorption of fixed expenses.
There is a close relationship between variable
costs and controllable costs classification.
It assists in the provision of relevant costs for
decision-making.
CVP Analysis
The intention of every business activity is to earn
profit and maximize it.
CVP analysis, also known as CVP relationship
aims at studying the relationships existing
among following factors and its impact on the
amount of profits:
Selling price per unit and total sales amount
Total cost, which may be fixed or variable, and
Volume of sales
Relationship Of Costs
And Profits With Volume
In Management Accounting, it is very important
to find out how costs and profits vary in relation
to changes in volume, i.e. quantity of the product
manufactured and sold. Under certain
assumptions, the relationships are usually found
to be linear.
This means that if we draw a graph with volume
on the X-axis and costs or profits on the Y-axis,
the graph will be a straight line.
Relationship Of Costs
And Profits With Volume
Assumptions for linear relationships
Every cost can be classified as fixed or
variable
Selling price remains same
There is only one product and in case of more
than one product, product mix is assumed to
be same.
Contribution
Contribution = Sales Variable Cost
Contribution = Fixed Cost + Profit
Margin Of Safety
These are the sales beyond the breakeven point.
A business will like to have a high margin
of safety because this is the amount of
sales which generates profits.
Margin of Safety = Sales Break-even
Sales