Notes on Marginal and Asorption and BEP-Ela-2019.pdf - CENTER FOR INVESTMENT PROFESSIONAL STUDIES(CIPS 2.2 Management Accounting ICAG MAY 2019 DIET

Notes on Marginal and Asorption and BEP-Ela-2019.pdf -...

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CENTER FOR INVESTMENT & PROFESSIONAL STUDIES (CIPS) 2.2 Management Accounting ICAG MAY 2019 DIET CLASSES Tel: 0543-476-192/0501-481-177 Marginal Costing & Absorption Costing 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 convention ally classified. The marginal cost of a product –“ is its variable cost”. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads. Marginal costing is formally defined as: ‘the accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making’. (Terminolo gy.) The term ‘contribution’ mentioned in the formal definition is the term given to the difference between Sales and Marginal cost. Thus MARGINAL COST = VARIABLE COST DIRECT LABOUR + DIRECT MATERIAL + DIRECT EXPENSE + VARIABLE OVERHEADS CONTRIBUTION: SALES - MARGINAL COST The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context. Note Alternative names for marginal costing are the contribution approach and direct costing. In this notes, we will study marginal costing as a technique quite distinct from absorption costing. Theory of Marginal Costing The theory of marginal costing as set out in “A report on Marginal Costing” published by CIMA, London is as follows: 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:
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CENTER FOR INVESTMENT & PROFESSIONAL STUDIES (CIPS) 2.2 Management Accounting ICAG MAY 2019 DIET CLASSES Tel: 0543-476-192/0501-481-177 1. 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 GH¢3,000 and if by increasing the output by one unit the cost goes up to GH¢3,002, the marginal cost of additional output will be GH¢.2.
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