APLIFICATION OF MARGINAL COSTING IN TERMS OF

COST CONTROL

INTRODUCTION TO MARGINAL COSTING:

Marginal costing is an accounting technique. Marginal costing is not a system of

costing such as process or job costing. As marginal costing is a technique, it may be used in
conjunction with any costing method. Marginal costing as a technique helps the management
to measure the profitability of an undertaking by considering the underlying cost behaviour.
Marginal costing is an impotent technique, which guides the management theory. Marginal
costing is also known as direct costing or variable costing or differential costing or
incremental costing or comparative costing.

DEFINITION:

According to ICMA London “marginal cost is the amount for any given volume of
output by which aggregate costs are changed if the volume of output is increased or
decreased by one unit”. Marginal costing is the technique of applying the concept of marginal
cost in decision making process. Marginal costing is a technique that distinguishes between
fixed and variable costs. The “marginal” cost of a product is its variable cost.

APPLICATIONS OF MARGINAL COSTING:

Marginal costing is a very useful tool for management because of its following
applications and merits:

1. Cost control:
Marginal costing divides the total cost into fixed and variable cost can be
controlled by the top management and that to limited extent. Variable costs can be
controlled by the lower level of management. Marginal cost by concentrating all
efforts on the variable costs can control and thus provides a tool to the management
for control of total cost.
In marginal costing fixed costs are not eliminated at all. These are shown
separately as a deduction from the contribution instead of merging with cost of sales
and inventories. This helps the management to have a control on fixed costs.

Profit planning and maintaining desired level of profit:

Marginal costing helps the profit planning, that is planning for future
operations in such a way s to maximize the profits to maintain a specified level of
profit. Absorption costing fails to bring out the correct effect of change in sale price,
variable cost are product mix on the profits of the concern but that is possible with the
help of marginal costing.
Profits are increased or decreased as a consequence of fluctuations in selling
prices, variable costs, and sales quantities in case there is fixed capacity to produce
and sell.
The first step in the profit planning is to know the break- even point. The second
step is to bring out the effect of changes on sale price, variable cost, or product mix
clearly may be ascertained as follows:

Fixed costs+desired profit

Desired cost =
P/V ratio

Evaluation of performance:
The different products, departments markets and sales divisions have different
profit earning potentialities. Marginal cost analysis is very useful for evaluating the
performance of each sector of a concern.
Performance evaluation is better done if distinction is made between fixed and
variable expenses.

Decision making:
 The information provided by the total cost method is not sufficient in solving
the management problems. Material costing techniques is used in providing assistance
to the management in vital decision making, especially in declaring wit the problems
requiring short-term. Decisions where fixed costs are excluded.

Introduction of a new product or line:

A business concern producing only one type of article or multi product concern
may add another product either to make use of the available felicities which are
otherwise idle or to capture new market. The decision to do so necessarily center
round the profitability of new product.

The following are the important areas, where managerial problems are
simplified by use of the marginal costing:
1. Fixation of selling price.
2. Key or limiting factors.
3. Make or by decisions
4. Selection of a suitable product mix.
5. Effect of change in price.
6. Maintaining a desired level of profit.
7. Alternative methods of products.
8. Diversification of products.
9. Closing down or suspending activities.
10. Alternative course of action.