Preview

Marginal Costing as a Tool for Decision Making

Good Essays
Open Document
Open Document
8722 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Marginal Costing as a Tool for Decision Making
MARGINAL COSTING AS A COSTING SYSTEM

Marginal Costing is a type of flexible standard costing that separates fixed costs from proportional costs in relation to the output quantity of the objects. In particular, Marginal Costing is a comprehensive and sophisticated method of planning and monitoring costs based on resource drivers. Selecting the resource drivers and separating the costs into fixed and proportional components ensures that cost fluctuations caused by changes in operating levels, as defined by marginal analysis, are accurately predicted as changes in authorized costs and incorporated into variance analysis.
This form of internal management accounting has become widely accepted in business practice over the last 50 years. During this time, however, the demands placed on costing systems by cost management requirements have changed radically.
MARGINAL COST
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. It is the cost of producing one more unit of a good.
Mathematically, the marginal cost (MC) function is expressed as the first derivative of the total cost (TC) function with respect to quantity (Q). Note that the marginal cost may change with volume, and so at each level of production, the marginal cost is the cost of the next unit produced.
A typical Marginal Cost Curve
In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory.
In practice, the analysis is segregated into short and long run cases, and over the longest run, all costs are marginal. At each level of production and time period being considered, marginal costs include all costs which vary with the level of production, and other costs are considered fixed costs.
A number of other factors can

You May Also Find These Documents Helpful

  • Powerful Essays

    (a) Maringal cost is the change in total costs or in total variable costs per unit change in output (Salvatore, 2012, pg. 718). The main reason to determine marginal cost is to gain understanding and knowledge of when a company reaches economics of scale. However, incremental cost is the total increase in costs from implementing a particular managerial decision (Salvatore, 2012, pg. 716). These costs are a broader concept and they ultimately refer to the change in total costs from implementing a particular management decision, such as introducing a new product line or the production of a previously purchased component. Incremental cost can potentially result in no increase in output or a large increase in out put.…

    • 2075 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    Egt1 Task 309.1.1-05 06

    • 864 Words
    • 4 Pages

    B: Marginal cost is the variation in the total cost of production as a result of the production of one more or one less unit. Marginal cost is important in figuring out whether or not to vary the production rate. Typically, marginal cost decreases as the output increases due to factors such as the cost of bulk rate materials, the efficient use of the existing equipment and labor specializations of the employees. A sale at a price higher than the average marginal cost will result in the company making more profit even though the price doesn’t cover the average total unit cost. Marginal cost can be seen as the lowest amount at which a sale can be made without subtracting from the profits of a company. Marginal Cost = Total Cost divided by Quantity or (Marginal Cost)…

    • 864 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Egt Task 1

    • 577 Words
    • 3 Pages

    Marginal cost is the added cost for a company to make one or more units of production. Total cost (TC) is the combination of all variable and fixed cost expenses at various levels of production. The total fixed costs are steady costs that are not dependent on the level of output and remain the same no matter how much product is produced verses that variable total costs increase or decrease depending on the number of items produced in a particular time period. To calculate marginal cost, you would need to divide the total cost by the total output. “Marginal costs are costs the firm can control directly and immediately. Specifically, MC designates all the cost incurred in producing the last unit of output. Thus, it also designates the cost that can be “saved” by not producing that…

    • 577 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    A) A marginal cost is the additional cost to you over and above the costs you have already incurred. Hence here the marginal cost is $7.50…

    • 2116 Words
    • 9 Pages
    Powerful Essays
  • Satisfactory Essays

    ECO 550 Midterm Exam

    • 620 Words
    • 3 Pages

    14. Marginal factor cost is defined as the amount that an additional unit of the variable input adds to ____.…

    • 620 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    B. Marginal cost is the overall change in a firms total cost of production resulting from a change in production by one unit.…

    • 304 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Marginal Analysis is a spending decision made based off of the analysis of the cost versus the benefits. I have in many times used this type of analysis. For example, purchasing the college school books. I consider the value of the book first and then begin to mentally weigh in the cost versus the benefits in purchasing the book. I then determine if the potential resale value and information gained from the book out weights the cost. There is also times when the information gained does outweigh the cost therefore through my own marginal analysis the benefit would be greater than the…

    • 103 Words
    • 1 Page
    Satisfactory Essays
  • Good Essays

    Analyzing the marginal costs will benefit us in the long run because when we live on a budget, we spend most of our lives trying to find the most out of our spending. Let’s say that one person who lives on a tight budget, but they would like to have a nice vacation in one point of their lives. They would work toward that point and find out how much they would need for the costs of the trip. Every dollar now becomes crucial to their spending because we must know how much we can afford and have to be wise about it. We cannot go out there and start spending like mad because in the end we’ll ask ourselves, “Now how are we going to pay this off?” So calculating within the budget is necessary, but keeping in mind that we should be able to actually enjoy the vacation without being tedious of every single cent that is coming out of our pocket.…

    • 455 Words
    • 2 Pages
    Good Essays
  • Good Essays

    A sunk cost is costs that have already incurred and can no longer be recovered. Hence it is irrelevant in the current decision process. Thus the marginal cost is the additional cost incurred in producing one more unit or servicing one more customer (Economics Online, n.d). To illustrate this, a firm has purchased a production machine for $100,000. This purchased is a sunk cost. As for the marginal cost, if the total cost of producing one unit of product A is $10 and the second unit cost $8, then the marginal cost of producing the second unit is $8.…

    • 633 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Marginal cost of unique is $ 20.00 as a marginal cost is the cost that is incurred due to the increase of the cost divided by increase in the quantity.…

    • 866 Words
    • 4 Pages
    Good Essays
  • Better Essays

    Marginal cost refers to the change in total cost when we produce another unit of output. The short-run marginal cost curve is generally U-shaped, reflecting the law of diminishing marginal returns. Also, the marginal cost curve intersects both the average total cost and average variable cost curves at their lowest points.…

    • 2766 Words
    • 12 Pages
    Better Essays
  • Satisfactory Essays

    When purchasing a home a person needs to take the 10 principles of economics into consideration. If the wrong decision is made it can cause many long-term financial consequences for the individual. One of the major principles that will play a major role on deciding to purchase a home will be principle6: Markets are usually a good way to organize economic activity. It is important to make sure you are researching to determine what how the real estate market is doing at that time to determine you are not overpaying for your home which can lead to financial struggles in the long run. Another principle that will affect the person’s decision is principle 1: People face trade-offs. A person has to take into consideration that once the go from renting to purchasing a home there are many financial responsibilities they must take on. They will no longer be able to rely on a landlord for things such as repairs, lawn maintenance and so forth. Upon purchasing a home they are now financially responsible for everything themselves. This is also a good example of principle 2: the cost of something is what you give up to get it. A person is giving up the peace that comes with knowing no matter what breaks or goes wrong it is not their responsibility but that the responsibility falls on the landlord.…

    • 353 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Hint : Remember, marginal revenue is the change in revenue received from producing an additional unit, while marginal cost is the additional cost of producing another unit.…

    • 2115 Words
    • 9 Pages
    Satisfactory Essays
  • Satisfactory Essays

    The basic average cost and marginal cost of a company are very different concepts, but they work together and fluctuate up and down according to how the other cost grows or declines. Average cost can be described as the ratio of the total cost to the total number of goods sold. It is equal to the total cost of the goods sold divided by the number of items sold. It has a very strong relationship with the supply and demand curves. Average cost can also be described as the sum of the average variable costs and average fixed costs. On the other hand, marginal cost is the cost that has incurred due to an additional unit or product. The average cost and marginal cost are inter-related because when the marginal cost goes up, or down, the average cost will fluctuate as well.…

    • 344 Words
    • 2 Pages
    Satisfactory Essays