43453432 Marginal Costing | Cost Of Goods Sold | Inventory

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Concept of Marginal Cost, Marginal Costing Marginal cost is defined as, ³the variable cost of one unit of a product or a service, i.e., a cost which would be avoided if the unit was not produced or provided.´ Marginal cost, in cost accounting, means variable production cost, that is, the cost which tends to vary in direct proportion to the changes in the production level. If an extra unit of output is produced, the cost which would be incurred for producing this extra unit will only be marginal
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  Concept of Marginal Cost, Marginal   Costing Marginal cost is defined as, ³the variable cost of one unit of a product or a service, i.e., a cost which would be avoided if theunit was not produced or provided.´Marginal cost, in cost accounting, means variable productioncost, that is, the cost which tends to vary in direct proportion tothe changes in the production level. If an extra unit of output is produced, the cost which would be incurred for producing thisextra unit will only be marginal or variable costs since fixedcosts remain constant.The term marginal costing is generally used in U.K. while in theU.S.A direct costing is more popular term. Marginal costing isalso called as ³Direct Costing´. According to marginal costingtechnique variable cost are charged to cost units and the fixedcost attributable to the relevant period is written off in fullagainst the contribution for that period.Marginal costing is the costing technique in which only variablemanufacturing cost are considered and used while valuinginventories and determining cost of goods sold. That means onlyvariable manufacturing costs are considered, product cost areallocated to products manufactured. The whole technique of marginal costing is based on this assumption that, all cost can bedivided into fixed costs and variable costs.  It is also defined as, ³The 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´. The marginal costis composed of all variable costs, which mainly include directmaterials, direct labour, direct expenses and some portion of indirect expenses. That means both the term marginal costs andthe direct costs are virtually the same thing. That is the reasonthe term ³Marginal costing is also referred to as ³Directcosting´.Marginal costing is also defined as every expense, whether for  production, selling or distribution, incurred due to particular decisions´, i.e. decision to increase production by one unit.Economists define marginal cost as the additional cost of  producing one unit. However, businessmen are interested not inone unit, but in block of units. Marginal costing has beendefined as, ³The ascertainment of marginal cost and the effecton the profit, of changes in volume or type of output, bydifferentiating between fixed and variable costs´. Hencemarginal costing relates to the changes in output in the particular circumstances under consideration.SalesLess: variable costContributionLess: fixed costProfit/Lossxxxxxxxxxxxxxxx  Ab sorption Costing Absorption costing also known as full costing, is a costingtechnique in which all manufacturing costs, variable and fixed,is considered as costs of production and is used in determiningthe cost of goods manufactured and inventories. Allmanufacturing costs are fully absorbed into finished goods.Marginal costing and absorption costing differs from each other.Absorption costing influence inventory values differently. Difference b etween Marginal Costing and Ab sorptionCosting Marginal costing and absorption costing differ from eachother in following aspects:1.   COST ELEMENTS IN PRODUCT COST: they differ only in the treatment of fixed factory overheads in theaccounting records and financial statement. In both thecosting techniques it is agreed that selling andadministrative expenses, whether variable of fixed, are period cost and these costs are not treated as product costwith the result that selling and administrative expensesare not included in the cost of inventories, and cost of goods sold« similarly, it is also agreed that variablemanufacturing costs are products costs, i.e. costs to be  charged to the product. The disagreements between thetwo, is only in regard to the treatment of fixedmanufacturing costs.2.   INVENTORY VALUES: they influence inventoryvalues differently. The values of inventories under marginal costing are relatively at a lower figure asinventories are determined in terms of only variable production costs. In absorption costing, the value of inventories is completely at a higher figure because itconsiders fixed factory overheads also besides thevariable production costs.3.   DIFFERENCE IN NET INCOME: The treatment of fixed factory overheads brings difference in the netincome figures in the two costing techniques. Themagnitude of any difference in net incomes is a functionof fixed manufacturing cost per unit
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