Marginal Costing Problems And Solutions PdfBy Rabican D. In and pdf 20.04.2021 at 02:07 3 min read
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- Marginal cost
- Marginal Revenue and Marginal Cost Practice Question
- Advantages and Disadvantages of Marginal Costing
Sales value to earn profit of Rs.
Karim Uddin. Bill Gates. Download PDF. A short summary of this paper. In the absence of profits, in the long run, management is not interested to continue that product. Management wants to ensure a reasonable return on the investment made.
Absorption costing facilitates that objective. The objective of management, under absorption costing, is that each product recovers its full cost and leaves something towards profit as a return on investment. All products may not give equal contribution. Selling price of some products may cover the variable cost component, fully, while they may not cover the fixed cost component, totally.
Though full costs are not recovered, in the short run, management continues production as they leave certain amount in the form of contribution that would cover the fixed costs, at least, partly. This is only short-term approach. In the long -run, every firm wants to recover full costs, both fixed and variable, and leave something towards planned profits, which is the objective of every firm to maximize.
This is a short-term objective. Any management for a long period, permanently, cannot sustain, ignoring recovery of fixed costs. Under absorption costing, management is concerned with recovery of total costs. Unless total costs are recovered, management does not continue production of the concerned product.
Basically, this is a long-term objective. The objectives of marginal costing and absorption costing are conflicting with each other. Marginal costing is appropriate in the short-run and for selecting special orders, while absorption costing is suited as a long-term objective.
The objectives of marginal costing and absorption costing are not one and the same, in respect of recovery of costs. Both Absorption Costing and Marginal Costing have their own role to play. If only variable costs are recovered by the unit cost, when and how fixed costs can be recovered?
When a special export order is under consideration, application of absorption costing may result in rejection of the order when full cost is not recovered by the unit cost in the proposed export order. Marginal costing is the right technique to decide on such special orders. Application of MarginalCosting results in acceptance of the special order as the same unit cost results in recovery of variable costs, totally, and leaves something towards contribution, which results in increased profits of the firm.
The special order may be rejected, if absorption costing is applied for determining the cost. Depending on the context, suitable application is to be made. However, fixed costs are ignored in Marginal costing for valuation of cost of production and closing stock. Profit calculated between Absorption costing would be different from the profit calculated under Marginal costing.
The basis could be a percentage of direct material or percentage of direct labour or rate per article etc. Whatever be the basis of apportionment of fixed cost to different products, it cannot be said that the apportionment is exact and definite.
Charging of fixed costs creates certain problems. Cost of production would be higher in Absorption Costing, compared to Marginal Costing, due to inclusion of fixed cost component in the former.
A simple example would explain the picture better. There is no increase in the price of raw materials or labour. However, the cost of production per unit has gone up by Rs. It appears illogical. Some people, therefore, argue that the fixed costs should not be considered, while computing the cost of product.
In Marginal costing, fixed costs are charged against a fund, arising out of excess of selling price over variable cost. This is the logic of marginal costing. When sales and production coincide no opening stock and closing stock situation , profit would be same under both Absorption costing and Marginal costing. If closing stock were more than the opening stock, profit under Absorption Costing would be more than profit under Marginal Costing. This is, because, under Absorption Costing, a portion of fixed overhead is charged to the closing stock and carried over to the next year, instead of being charged to the current period.
If closing stock is less than the opening stock, the profit shown under Absorption Costing will be lower than the profit under Marginal Costing.
This is because a portion of fixed cost relating to the previous year is charged to the current period. The following examples would explain. Illustration No. As there is no opening stock, the difference in profit is due to valuation of closing stock, alone.
Thus, the profit under Absorption Costing System would be more as compared to Marginal Costing, if closing stock only exists, without any opening stock. In case, there are no stocks Opening stock and closing stock whatsoever, the profits under both absorption costing and marginal costing will be the same. Details of cost of production shows variable costs are Rs. They are uniform for three months. The costs of their manufacture are as The total overheads are Rs.
Out of which Rs. It is decided to apportion these costs over different products in the ratio of output. You are required to prepare separate statements, showing cost of each product and profit according to Absorption Costing and Marginal Costing.
Note: Net profit is same both in Absorption Costing and Marginal Costing, due to absence of closing stock and opening stock. However, production has been only 5, units. Hence, under absorbed overhead has been charged.
However, total amount of profit is same Rs. So cumulative profit is same under both absorption costing and marginal costing. The total overheads are Rs. Compute the amount of profit under Marginal and Absorption Costing systems, in case the units sold of the products X, Y and Z are in each case. Comment on the reasons for the difference in profit between Absorption Costing and Marginal Costing. What would be the impact of closing stock and opening stock on the profits shown between Absorption Costing and Marginal Costing?
This is on account of the difference in valuation of closing Stock on account of fixed costs. The closing stock under Absorption Costing System is Rs. The difference in profit Rs. In second month, the closing stock is more than the opening stock. Profit in absorption costing is Rs. If opening stock is more than the closing stock, profit in marginal costing would be more than the profit in absorption costing.
Stock in absorption costing always contain fixed costs component. As opening stock is more than the closing stock, profit would be less in absorption costing, compared to marginal costing. It may be noted that fixed costs would not be apportioned in marginal costing. This situation is evident in the third month, with a profit of Rs. The profit determined under Marginal Costing is a linear function of sales. In other words, contribution is exactly proportional to sales. Changes in production and sales do not have any impact on contribution.
See all the four columns in Marginal Costing. Profit determined under Absorption Costing is influenced by both production and sales. All costs are treated as product costs. Under absorption costing, all costs, both variable and fixed, are charged to the products for cost determination. Name the main difference between 'Absorption Costing' and 'Marginal Costing'. In 'Absorption costing', there is no difference between fixed costs and variable costs for treatment.
Both are charged to production in the year in which they are incurred. Fixed costs are apportioned to different products on a suitable basis. In other words, all costs are charged to production for determining the selling price. However, in 'Marginal costing', fixed costs are ignored and only variable costs are considered for determining the selling price.
Orders that may be refused in absorption costing may be accepted in marginal costing. Explain the reasoning. Yes, orders that may be refused in absorption costing may be accepted in marginal costing.
Marginal Revenue and Marginal Cost Practice Question
Marginal Costing and Cost Volume Profit Analysis Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product. It is concerned with the changes in variable costs. Fixed cost is treated as a period cost and is transferred to Profit and Loss Account. Marginal Costing: Marginal Costing may be defined as "the ascertainment by differentiating between fixed cost and variable cost, of marginal cost and of the effect on profit of changes in volume or type of output.
Advantages and Disadvantages of Marginal Costing
In an economics course , you will likely have to calculate measures of costs and revenue on homework problem sets or on a test. Testing your knowledge with practice questions outside of class is a good way to ensure you understand the concepts. Here is a 5-part practice problem that will require you to calculate total revenue at each quantity level, marginal revenue , marginal cost, profit at every quantity level and fixed costs. Given the data they have provided you with see table , you are asked to compute the following:.
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