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Marginal & Differential Costing

Marginal costing refers to the additional or incremental cost of producing one more unit. It includes only variable costs and not fixed costs. Marginal costing is useful for short-term decision making like break-even analysis, pricing decisions, and determining minimum prices. Differential costing considers the difference in costs between alternative decisions or output levels. It can help companies determine the optimal production volume where total differential costs are lowest and incremental revenues are highest. Both marginal and differential costing focus only on variable costs and ignore fixed costs, making them useful tools for short-term analysis and decision making.

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2K views

Marginal & Differential Costing

Marginal costing refers to the additional or incremental cost of producing one more unit. It includes only variable costs and not fixed costs. Marginal costing is useful for short-term decision making like break-even analysis, pricing decisions, and determining minimum prices. Differential costing considers the difference in costs between alternative decisions or output levels. It can help companies determine the optimal production volume where total differential costs are lowest and incremental revenues are highest. Both marginal and differential costing focus only on variable costs and ignore fixed costs, making them useful tools for short-term analysis and decision making.

Uploaded by

Shahena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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MARGINAL &

DIFFERENTIAL
COSTING

Presentation By:- 55,58,60,65,68,86,91,93


An overview of different types of Cost :
› Cost on the basis of behavior :
– Fixed Cost
– Variable Cost
– Semi- Variable Cost

› Classification on the basis of Elements :


– Direct Cost
– Indirect Cost
MARGINAL COSTING :
› Marginal costing refers to the increase or decrease in the cost of producing one more unit or serving one
more customer
› It is also known as incremental costing
› Marginal costs are based on production expenses that are variable or direct – labour, materials, and
equipment, for example – and not fixed costs the company will have whether it increases production or
not

› Fixed costs might include administrative overhead and marketing efforts – expenses that are the same no
matter how many pieces are produced

› Marginal cost refers to the additional cost to produce each additional unit
Important Formula to Remember:

Sales
(-) Variable Cost (V.C.) No. of Unit = F.C. + Profit
Contribution Contribution
(-) Fixed Cost (F.C.)
Net Profit / Profit

BEP(Break Even Point) = Fixed cost


Contribution
Example, From the following information find out the amount of profit earned during the year using the
marginal costing technique. Fixed cost Rs, 2,50,000; Variable cost Rs.10 per unit; Selling price Rs. 15 per
unit; Output level 75,000 units.

Sales Rs.75,000 * Rs.15 = Rs. 11,25,000

(-) Variable cost Rs.75,000 * Rs.10 = Rs.7,50,000

Contribution Rs.3,75,000

(-) Fixed cost Rs.2,50,000

Profit Rs.1,25,000
Advantages :
› Marginal costing is simple to understand
› It helps in short-term profit planning by breakeven and profitability analysis
› Practical cost control is greatly facilitated, efforts can be concentrated on maintaining a uniform and
consistent marginal cost, which is useful to various levels of management
› Helpful in Decision Making :-
– Make or Buy Decision
– Capturing the foreign Markets
– Change of Product Mix
– Sales Price in Normal Condition
– Determination of Minimum Price
– Temporary/Permanent closure of production
Disadvantages :
› Normal Costing systems also apply under normal operating volume and this shows that no advantage is
gained by marginal costing
› Under marginal costing, stocks and work in progress are understated, the exclusion of fixed costs from
inventories affect profit
› Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of
seasonal Factories
Differential Costing :
› Differential cost is the difference between the cost of two alternative decisions, or of a change in
output levels

›  The concept is used when there are multiple possible options to pursue, and a choice must be made to
select one option and drop the others

› The concept can be particularly useful in step costing situations, where producing one additional unit
of output may require a substantial additional cost

› Differential Costing is a broader term that includes both incremental costing and decremental costing

› When there is net excess revenue, the proposal will be accepted; otherwise it will be rejected
Example :
› There is a company called Insight manufacturer, they produces Bottles , From the following data
prepare a schedule showing the total differential costs and increments in the revenue. Find at what
volume the company should sell its level of production?

Output (no. in Selling Price Total Semi – Total Variable Total Fixed
Lakhs) Fixed Overheads (In Overheads (In
Overheads (In Lakhs) Lakhs)
Lakhs)
0.9 260 40 83.6 28.2
1.5 225 40 163.3 28.2
2.6 180 44 255.3 28.2
3.4 170 44 315.6 28.2
2 300 50 354.6 28.2
3.4 180 50 380.5 28.2
Solution :

Output (no. in Total Sales (In Incremental Total Costs(In Differential Costs
Lakhs) Lakhs) Revenue (In Lakhs) (In Lakhs)
Lakhs)

0.9 234 - 151.8 -


1.5 337.5 103.5 231.5 79.7
2.6 468 130.5 327.5 96
3.4 578 110 387.8 60.3
2 600 22 432.8 45
3.4 612 12 458.7 25.8
THANKYOU

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