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Marginal Cost

In: Business and Management

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CHAPTER 26

Marginal Costing and Cost Volume Profit Analysis
Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product." Thus, the concept marginal cost indicates wherever there is a change in the volume of output, certainly there will be some change in the total cost. It is concerned with the changes in variable costs. Fixed cost is treated as a period cost and is transferred to Profit and Loss Account. Marginal Costing: Marginal Costing may be defined as "the ascertainment by differentiating between fixed cost and variable cost, of marginal cost and of the effect on profit of changes in volume or type of output." With marginal costing procedure costs are separated into fixed and variable cost. According to J. Batty, Marginal costing is "a technique of cost accounting pays special attention to the behaviour of costs with changes in the volume of output." This definition lays emphasis on the ascertainment of marginal costs and also the effect of changes in volume or type of output on the company's profit.

FEATURES OF MARGINAL COSTING
(1)

All elements of costs are classified into fixed and variable costs. Marginal costing is a technique of cost control and decision making. Variable costs are charged as the cost of production. Valuation of stock of work in progress and finished goods is done on the basis of variable costs. Profit is calculated by deducting the fixed cost from the contribution, i.e., excess of selling price over marginal cost of sales. Profitability of various levels of activity is detennined by cost volume profit analysis.

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