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Marginal Cost Presentation.
Marginal Cost Presentation.
Marginal Cost Presentation.
acceptable criteria or concept. We can apply this same idea to product costing and ask ourselves what will the next one cost To do this we must consider how we view costs.
Marginal Costing
We must now ask ourselves the question:
Marginal Costing
Insurance Maintenance
If we plan to drive 10,000 miles what would the 10,001st mile cost?
Insurance
Fixed
Fuel costs are dependant upon the distance we travel Tax and insurance are both fixed are independent of distance travelled Maintenance has both fixed and variable elements within it
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Marginal Costing
If we consider the distance travelled to be the product of owning a car. For each mile travelled we incur additional fuel cost.
Maintenance is a mix of costs some determined by distance travelled and others not
Marginal Costing
For marginal costing what we must consider is cost in relationship to changes in output: Thus for a given volume of output additional units of production can be obtained for less that proportionate cost.
In simpler terms if unit cost is equal to Total Cost divided by the number of units.
Then the cost incurred in producing an additional unit will be that portion of the unit cost which is variable (the product cost).
Thus the unit cost falls fixed cost is spread over a greater number of units.
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Marginal Costing
Within limits the total of certain items of cost will remain fixed and the remainder will vary in proportion to the volume of production If a company were to double its output then the fixed elements of cost would increase for example: Larger premises might be required More equipment
Marginal Costing
The theory of marginal costing can be summarised as follows:
It is fundamental to the marginal cost approach that costs are segregated into those which tend to remain constant at varying levels of output and those which vary proportionately with the level of output
Total cost
Variable cost
Fixed cost
Output
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Marginal costing has developed from a particular view of the nature and behaviour of cost and how these affect the profitability of an enterprise.
The principal assumption is that the difference between the marginal cost of products (the variable cost) and the selling price leaves a fund from which to meet fixed cost and provide a profit.
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Marginal costing
In short:
For increased output the share of fixed cost that any particular unit carries reduces, and conversely
For decreased output the share of fixed costs that any particular unit caries increases.
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Marginal costing
Variable costs are in direct relationship with the number produced.
Absorption costing does not recognise the distinction between fixed and variable costs fixed costs are charged to each unit even though there is no direct relationship.
Returning to our car: Although maintenance and depreciation cost will be affected. The principle cost of any journey is the fuel consumed. Tax and insurance cost remain unaffected.
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Marginal costing
If absorption costing were to be used all costs of running the car over a year would be taken together and divided by the annual mileage giving the average (or absorbed) cost per mile. This would then be used to calculate the cost of our journey.
In marginal costing since tax and insurance, the fixed costs, are unaffected by distance we must calculate the marginal or extra cost of our journey.
Marginal costing
Absorbed costs will often cloud the issue when deciding upon the outcome of particular events.
In making particular decisions it can be assumed that fixed costs will remain fixed in the short term. In the longer term however even fixed costs will alter, for example if the firm were to expand or contract.
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Marginal costing
Shown graphically:
Cost
Total cost
Short term
Variable cost
Time
Total cost
Long term
Variable cost
Fixed cost
Time
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