The definition and features of a marginal costing system

The definition and features of a marginal costing system Introduction The costs that vary with a decision should only be included in decision analysis. For many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time, fixed costs are not relevant to the decision. This is because either fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term Marginal costing definition Marginal costing distinguishes between fixed costs and variable costs as conventionally classified. The marginal cost of a product -is its variable cost. This is normally taken to be, direct labor, direct material, direct expenses and the variable part of overheads. What is Marginal Costing? It is a costing technique where only variable cost or direct cost will be charged to the cost unit produced. Marginal costing also shows the effect on profit of changes in volume and type of output by differentiating between fixed variable costs. Salient Points: Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing; In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred; Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs. The marginal cost statement is the basic document/format to capture the marginal costs. Features of Marginal Costing System: It is a method of recording costs and reporting profits; All operating costs are differentiated into fixed and variable costs; Variable cost charged to product and treated as a product cost whilst Fixed cost treated as period cost and written off to the profit and loss account Advantages Marginal costing is simple to understand. By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided. It prevents the illogical carry forward in stock valuation of some proportion of current years fixed overhead. The effects of alternative sales or production policies can be more readily available and assessed, and decisions taken would yield the maximum return to business. It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate. Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost. It is useful to various levels of management. It helps in short-term profit planning by breakeven and profitability analysis, both in terms of quantity and graphs. Comparative profitability and performance between two or more products and divisions can easily be assessed and brought to the notice of management for decision making. Disadvantages The separation of costs into fixed and variable is difficult and sometimes gives misleading results. Normal costing systems also apply overhead under normal operating volume and this shows that no advantage is gained by marginal costing. Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from inventories affect profit and true and fair view of financial affairs of an organization may not be clearly transparent. Volume variance in standard costing also discloses the effect of fluctuating output on fixed overhead. Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories. Application of fixed overhead depends on estimates and not on the actual and as such there may be under or over absorption of the same. Control affected by means of budgetary control is also accepted by many. In order to know the net profit, we should not be satisfied with contribution and hence, fixed overhead is also a valuable item. A system which ignores fixed costs is less effective since a major portion of fixed cost is not taken care of under marginal costing. In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the assumptions underlying the theory of marginal costing sometimes becomes unrealistic. For long term profit planning, absorption costing is the only answer. Marginal Costing Formulae:- MARGINAL COST = VARIABLE COST DIRECT LABOUR + DIRECT MATERIAL + DIRECT EXPENSE + VARIABLE OVERHEADS Theory of Marginal Costing The theory of marginal costing as set out in A report on Marginal Costing. In relation to a given volume of output, additional output can normally be obtained at less than proportionate cost because within limits, the aggregate of certain items of cost will tend to remain fixed and only the aggregate of the remainder will tend to rise proportionately with an increase in output. Conversely, a decrease in the volume of output will normally be accompanied by less than proportionate fall in the aggregate cost. The theory of marginal costing may, therefore, by understood in the following two steps: If the volume of output increases, the cost per unit in normal circumstances reduces. Conversely, if an output reduces, the cost per unit increases. If a factory produces 1000 units at a total cost of Rs. 3,000 and if by increasing the output by one unit the cost goes up to Rs. 3,002, the marginal cost of additional output will be Rs.2. If an increase in output is more than one, the total increase in cost divided by the total increase in output will give the average marginal cost per unit. If, for example, the output is increased to 1020 units from 1000 units and the total cost to produce these units is Rs. 1,045, the average marginal cost per unit is Rs. 2.25. It can be described as follows: Additional cost = Additional units Rs. 45 = Rs. 2.25   Ã‚  Ã‚  20 The ascertainment of marginal cost is based on the classification and segregation of cost into fixed and variable cost. In order to understand the marginal costing technique, it is essential to understand the meaning of marginal cost. Marginal cost means the cost of the marginal or last unit produced. It is also defined as the cost of one more or one less unit produced besides existing level of production. In this connection, a unit may mean a single commodity, a dozen, a gross or any other measure of goods. For example, if a manufacturing firm produces X unit at a cost of Rs. 300 and X+1 units at a cost of Rs. 320, the cost of an additional unit will be Rs. 20 which is marginal cost. Similarly if the production of X-1 units comes down to Rs. 280, the cost of marginal unit will be Rs. 20 (300-280). The marginal cost varies directly with the volume of production and marginal cost per unit remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all variable overheads. It does not contain any element of fixed cost which is kept separate under marginal cost technique. Marginal costing May be defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making. It should be clearly understood that marginal costing is not a method of costing like process costing or job costing. Rather it is simply a method or technique of the analysis of cost information for the guidance of management which tries to find out an effect on profit due to changes in the volume of output. Marginal costing technique has given birth to a very useful concept of contribution where contribution is given by: Sales revenue less variable cost (marginal cost) Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F + P). In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed cost (C = F). this is known as breakeven point. The concept of contribution is very useful in marginal costing. It has a fixed relation with sales. The proportion of contribution to sales is known as P/V ratio which remains the same under given conditions of production and sales. The principles of marginal costing The principles of marginal costing are as follows. For any given period of time, fixed costs will be the same, for any volume of sales and production (provided that the level of activity is within the relevant range). Therefore, by selling an extra item of product or service the following will happen. Revenue will increase by the sales value of the item sold. Costs will increase by the variable cost per unit. Profit will increase by the amount of contribution earned from the extra item. Similarly, if the volume of sales falls by one item, the profit will fall by the amount of contribution earned from the item. Profit measurement should therefore be based on an analysis of total contribution. Since fixed costs relate to a period of time, and do not change with increases or decreases in sales volume, it is misleading to charge units of sale with a share of fixed costs. When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred when output is increased. Features of Marginal Costing The main features of marginal costing are as follows: Cost Classification The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm following the marginal costing technique. Stock/Inventory Valuation Under marginal costing, inventory/stock for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method. Marginal Contribution Marginal costing technique makes use of marginal contribution for marking various decisions. Marginal contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments. Presentation of Cost Data under Marginal Costing Marginal costing is not a method of costing but a technique of presentation of sales and cost data with a view to guide management in decision-making. The traditional technique popularly known as total cost or absorption costing technique does not make any difference between variable and fixed cost in the calculation of profits. But marginal cost statement very clearly indicates this difference in arriving at the net operational results of a firm. Following presentation of two Performa shows the difference between the presentation of information according to absorption and marginal costing techniques: Summary Marginal cost is the cost management technique for the analysis of cost and revenue information and for the guidance of management. The presentation of information through marginal costing statement is easily understood by all mangers, even those who do not have preliminary knowledge and implications of the subjects of cost and management accounting.

The Olive Branch :: essays research papers

The Olive Branch   Ã‚  Ã‚  Ã‚  Ã‚  Ã¢â‚¬Å" Like dragonflies their [dead bodies] have filled the river. Like a raft they have moved to the edge [of the boat]. Like a raft they have moved to a river bank † (flood-myth.com, 3/15/00).   Ã‚  Ã‚  Ã‚  Ã‚  Whether the above is fact, fiction, myth, or legend it appears that all civilizations have a strong fascination with The Deluge. Bible believers feel that it was an act of God, who intern wanted to cleanse the earth of immoral people and evildoers. Chosen survivors, for example Noah, as well as present day Christians believe that the Flood was a marking point for a new covenant between God and themselves. However, the myths that have accumulated from each culture provide great colorful characters and death defying heros against the angst of the gods.   Ã‚  Ã‚  Ã‚  Ã‚  Often times the bible is compared to the â€Å"Gilgamesh Epic†, which is the oldest fictional novel known to man. The Babylonian epic tells a similar story of the flood. The gods within the story are very angered by humankind’s behavior. So they decided to punish them a flood. Ea, a Babylonian God, disagrees with extremely harsh treatment. He then instructs Utnapishtim to flee with his family and all the animals on a boat. This basic myth emerges from the â€Å"Gilgamesh Epic† but neighboring civilization, such as Sumeria, retell the same with different protagonist gods.   Ã‚  Ã‚  Ã‚  Ã‚  Traveling east into China the flood legend seems to take on a new meaning. The myth is recorded around 1000 b.c. by the Chou Dynasty. â€Å"The main difference between the Chinese flood myth and that of Western cultures seems to be the emphasis on why there was a flood. In the Western Myths the floods are brought about because of the anger of the gods, or at a whim of the gods, while in the Chinese myth the emphasis is on a very practical matter, the channeling of unruly waters in such a way to make the cultivation of land possible.†( cybercomm.com ,15 March) In other words, the purpose of the flood was to create better farm land. There was no sense of divine intervention.  Ã‚  Ã‚  Ã‚  Ã‚     Ã‚  Ã‚  Ã‚  Ã‚  Continuing east, the story picks up in the Mayan ruins. The â€Å"Popol-Vuh† , the Mayans sacred book, relates the tale of the destruction from flood. They felt that the purpose of the flood was to remedy the faulty creation of man, not to punish to mankind. The Feathered Serpent, who is the Mayan creator, first created man from mud, but they were without sight or substance.

“Barbie Doll” by Marge Piercy Essay

The poem, â€Å"Barbie Doll†, is about a girl who was growing up in a society which regard highly of female beauty. The title illustrates that most females were expected to be like Barbie dolls. These dolls cast pressure on the girl to be like supermodel. In this story, the girl failed to meet the standards of society and viewed as a social outcast.The first paragraph describes a growing girl who was presented with dolls, miniature GE stoves, irons and lipsticks. This will ensure that the girl will know which gender roles she should be and not too deviate from the accepted social custom. The mood of the poem changes when the author describes, the magic of puberty. Here, it refers to a time of emotional crisis that the girl went through as she matures. She is constantly teased for not looking like the typical Barbie dolls. The second paragraph began with mentioning the girls positive aspects, such as She was healthy, tested intelligent, possesses strong arms and back and abundant sexual drive and manual dexterity, These sentences portray the girl image (female) to male characteristics. The tome in the poem changes again when the author stated, the girl went to and fro apologizing, and everyone still say she had a fat nose and thick legs, the society again, scorn at the ugly appearance of the girl. In the third paragraph, line twelve to sixteen, the girl is expected to fake her natural behavior, emotion and characteristics. The fan belt was used to exemplify that one cannot endure the pressure placed by society to meet their standards and will wear out eventually. Consequently, she cut off her nose and legs. Therefore, the last paragraph expressed her death as consummation at last. Dont she look pretty? Everyone said. In this line, the author wants the reader to make good judgment to the senseless situation in which society judge beauty to female. I think that children, especially boys, are not born with hatred or feelings of enmity towards female who have physical figures below social standards. They are all programmed that way by selfish or ignorant male adults. If these male adults can only take a look at themselves and see that all they have done is to destroy. The lives of their opposite sex, driving down their  self-esteem to the deepest pit, then this society will be a better place to live in.

Jean Piaget and Cognitive Psychology - 2327 Words

Piaget insisted that cognitive development followed a sequence and that stages cannot be skipped and that each stage is marked by a new intellectual abilities and a more complex understanding of world by children , then experience discrepancies between what they already know and what they discover in their environment. The goal of this theory is to explain the mechanism and processes by which the infant , and then the child develops into an individual who can think using hypothesis . According to Woolfolk (2005) cognitive development is a person’s mental capacity to engage in reasoning , thinking ,interpretation , understanding ,knowledge acquisition , remembering ,organizing information ,analysis and problem solving†. This†¦show more content†¦Piaget (1954) believed that all children try to strike a balance between assimilation and accommodation , which is achieved through a mechanism which he called equilibration . As children progress through the stages of cognitive development , it is important to maintain a balance between applying previous knowledge and changing behavior to account new knowledge . Equilibrum helps explain how children are able to move from one stage of thought into the next . Piaget (1954) argues that children perform different kinds of operations at different stages in their cognitive development and that a child who has not reached the appropriate stage cannot perform that particular kind of operation for example an infant in the first stage cannot perform an operation belonging to the third stage .its senses and is also learning motor co-ordination , the control of its body . Hayes (1993:120) posits that according to Piaget (1954) at this stage the child has only a limited number . The second stage is the pre operational stage which ranges between two years and seven years .This stage is time of dramatic change and cognation. 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