Marginal Costing
MARGINAL COSTING
Introduction
This paper explores the use of cost accounting information for decision-making purposes.
DEFINITION OF KEY TERMS
Marginal cost: This is the cost of a unit of a product or service, which would be avoided if that unit or service was not produced or provided
Break-even point: This is the volume of sales where there is neither profit nor loss.
1 9 6 COST ACCOUNTING
S T U D Y T E X T
Margin of safety: This is the excess of sales over the break-even volume in sales. It states the extent to which sales can drop before losses begin to be incurred in a firm
Contribution: This is the difference between sales value and the marginal cost of sales.
To understand this topic, you need to understand the topic on cost behavior first. Marginal costing is built on cost behavior and terms. Of key importance are product costs, period costs, variable costs and fixed cost.
Product costs are costs identified with goods produced or purchased for resale. Such costs are initially identified as part of the value of stock and only become expenses when the stock is sold. In contrast, period costs are costs that are deducted as expenses during the current period without ever being included in the value of stock held. We saw how product costs are absorbed into the cost of units of output. Now we describe marginal costing and compare it with absorption costing.
Whereas absorption costing recognizes fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal costing treats all fixed costs as period costs. Two such different costing methods obviously each have their supporters and we will be looking at the arguments both in favor of and against each method. Each costing method, because of the different stock valuation used, produces a different profit figure and we will be looking at this particular point in detail.
197
Note that in marginal costing, all costs need to be
Introduction
This paper explores the use of cost accounting information for decision-making purposes.
DEFINITION OF KEY TERMS
Marginal cost: This is the cost of a unit of a product or service, which would be avoided if that unit or service was not produced or provided
Break-even point: This is the volume of sales where there is neither profit nor loss.
1 9 6 COST ACCOUNTING
S T U D Y T E X T
Margin of safety: This is the excess of sales over the break-even volume in sales. It states the extent to which sales can drop before losses begin to be incurred in a firm
Contribution: This is the difference between sales value and the marginal cost of sales.
To understand this topic, you need to understand the topic on cost behavior first. Marginal costing is built on cost behavior and terms. Of key importance are product costs, period costs, variable costs and fixed cost.
Product costs are costs identified with goods produced or purchased for resale. Such costs are initially identified as part of the value of stock and only become expenses when the stock is sold. In contrast, period costs are costs that are deducted as expenses during the current period without ever being included in the value of stock held. We saw how product costs are absorbed into the cost of units of output. Now we describe marginal costing and compare it with absorption costing.
Whereas absorption costing recognizes fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal costing treats all fixed costs as period costs. Two such different costing methods obviously each have their supporters and we will be looking at the arguments both in favor of and against each method. Each costing method, because of the different stock valuation used, produces a different profit figure and we will be looking at this particular point in detail.
197
Note that in marginal costing, all costs need to be