MEANING
FEATURES
ASSUMPTIONS
ADVANTAGES
LIMITATIONS
BY SHASHI AGGARWAL
LIMITATION OF ABSORPTION OF COSTING
1.
ABSORPTION COSTING IS ALSO
KNOWN AS FULL COSTING
2.
PRACTICE OF CHARGING ALL
COSTS BOTH VARIABLES AND FIXED COSTS
3.
COST PER UNIT REMAINS THE
SAME ONLY WHEN THE LEVEL OF OUTPUT REMAINS THE SAME
4.
DEPENDENT ON LEVEL OF
OUTPUT SO DIFFERENT UNIT COSTS ARE OBTAINED FOR DIFFERENT LEVEL OF OUTPUT
5.
IT IS NOT VERY USEFUL FOR
TAKING MANAGERIAL DECISIONS.
NEED OF MARGI ANAL COSTING
1.
AS WE KNOW ELEMENTS OF
TOTAL COST = FIXED EXPENSES + VARIABLE COST
2.
FIXED EXPENSES REMAIN
CONSTANT IN AGGREGATE AMOUNT AND DOES NOT VARY WITH INCREASE OR DECREASE IN
PRODUCTION UPTO A PARTICULAR LEVEL OF OUTPUT.
3.
FIXED COST PER UNIT VARY
4.
VARIABLE COST INCREASE OR
DECREASE IN PROPORTION TO INCREASE OR DECREASE THE OUTPUT AND REMAIN CONSTANT
PER UNIT
5.
A SPECIAL TECHNIQUE KNOWN
AS MARGINAL COSTING HAS BEEN DEVELOPED WHICH EXCLUDES FIXED OVERHEAD ENTIRELY
FROM THE COST OF PRODUCTION AND GIVES US A SAME COST PER UNIT UPTO A PARTICULAR
LEVEL.
MARGINAL COST
- IT IS THE ADDITIONAL COST OF THE ADDITIONAL UNIT. IN OTHER WORDS, IT
IS THE AMOUNT BY WHICH TOTAL COST INCREASES BY PRODUCING ONE ADDITIONAL
UNIT. IT IS ALSO THE AMOUNT BY WHICH TOTAL COST DECREASES BY NOT PRODUCING
ONE ADDITIONAL UNIT.
- MARGINAL COST MAY ALSO BE
DEFINED AS THE VARIABLE COST INCURRED ON A SPECIFIC ACTIVITY. UNIT MAY BE
A SINGLE ARTICLE,A BATCH OF ARTICLES OR AN ORDER ETC
- FOR EXAMPLE , THE COST OF PRODUCTION OF 1,000 UNIT OF TABLES IS RS
20,000
- AND THAT OF 1001 IS 20150
- SO THE MARGINAL COST IS 20,150-20,000=RS 150
MARGINAL COSTING
IT IS KNOWN AS VARIABLE COSTING. IT IS A TECHNIQUE WHICH IS CONCERNED WITH
THE CHANGES IN COSTS AND PROFITS RESULTING FROM CHANGE IN THE VOLUME OF OUTPUT.
MARGINAL COSTING MAY BE DEFINED AS THE ASCERTAINMENT OF MARGINAL COSTS AND
OF THE EFFECT ON PROFIT OF CHANGES IN VOLUME OR TYPE OF OUTPUT BY
DIFFERENTIATING BETWEEN FIXED AND VARIABLE COST.
MARGINAL COSTING HELPS THE MGMT IN UNDERSTANDING THE BEHAVIOUR OF COST
NOT A DISTINCT METHOD OF ASCERTAINMENT OF COSTS SUCH AS PROCESS OR JOB
COSTING
BUT A TECHNIQUE WHICH VARIABLE COSTS ARE CHARGED TO OPERATIONS /PROCESS
LEAVING ALL INDIRECT COSTS TO BE WRITTEN OFF AS AGAINST PROFIT IN THE PERIOD IN
WHICH THEY ARISE
ASSUMPTIONS
1.
ALL ELEMENTS OF
COST-PRODUCTION ,ADMIN,SELLING AND DISTRIBUTION ARE SEGREGATED INTO FIXED AND
VARIABLE COST.
2.
VARIABLE COST PER UNIT
REMAINS THE SAME
3.
FIXED COST CONSTANT FOR
THE ENTIRE VOLUME
4.
NO CHANGE IN SELLING PRICE
5.
THE VOLUME OF OUTPUT IS
ONLY FACTOR WHICH INFLUENCES THE COST.
FEATURES OF MARGINAL COSTING
- TECHNIQUE OF ANALYSIS AND PRESENTATION OF COSTS WHICH FACILITATES MGMT
TAKING VARIOUS DECISIONS
- ALL ELEMENTS OF COSTS ARE CLASSIFIED INTO VARIABLE, SEMI VARIABLE AND
FIXED COST.
- THE MARGINAL COSTS AS REGARDED THE COSTS OF PRODUCT.
- FIXED COSTS ARE TREATED AS PERIOD COSTS.
- THE SOCK OF FG AND WIP VALUED AT MARGINAL COSTS ONLY.
- PRICES ARE DETERMINED ON THE BASIS OF VARIABLE COST ONLY BY ADDING THE
CONTRIBUTION WHICH IS THE EXCESS OF SALES OVER MARGINAL COSTS OF SALE.
- SALE PRICE IS BASED ON MARGINAL COST PLUS THE CONTRIBUTION.
- PROFIT IS CALCULATED BY DEDUCTING MARGINAL COST AND FIXED COST FROM
SALE
- COST VOLUME PROFIT OR BREAK EVEN IS ONE OF THE INTEGRAL PART OF
MARGINAL COSTING
CALCULATION OF PROFIT UNDER MARGINAL COST
IN THE MARGINAL COST IT IS ASSUMED THAT THE DIFFERENCE BETWEEN THE
AGGREGATE SALE VALUE AND AGGREGATE MARGINAL COST IS KNOWN AS CONTRIBUTION.
CONTRIBUTION = FIXED COST + PROFIT ( -LOSS)
ADVANTAGE
•
SIMPLE TO UNDERSTAND AND
EASY TO OPERATE
•
THE VALUATION OF CLOSING
STOCK IS DONE AT MARGINAL COST
•
VERY USEFUL TECHNIQUE OF
PROFIT PLANNING
a)
VALUABLE TECHNIQUE IN
DECISION MAKING
b)
FIXATION OF SELLING PRICE
c)
BUY OR MAKE DECISION
d)
PROFITABLE SALES MIX
e)
LIMITING FACTOR
f)
PROFITABLE METHOD OF
PRODUCTION
§PROVIDES THE MGMT WITH USEFUL
TECHNIQUE LIKE BREAK EVEN OR CVP
§IT HELPS CONTROLLING IN
COST BY FOCUSING ON VARIABLE COST WHICH IS CONTROLLABLE
§HELPS IN EVALUATION OF
PERFORMANCE OF DIFFERENT DEPARTMENT.DIVISIONS AND PRODUCTS ETC
§FURNISHES A BETTER AND
MORE LOGICAL BASIS FOR FIXATION OF SELLING PRICE
§CHANGES IN PER UNIT C
SHOWS CHANGES IN EFFICIENCY IN FAR BETTER WAY
LIMITATIONS
1.
SEGREGATION OF ALL COSTS
INTO FIXED AND VARIABLE
2.
POSSIBILITY OF UNDER
RECOVERY AND OVER RECOVERY
3.
WRONG ASSUMPTIONS
4.
FAULTY VALUATION OF STOCK
5.
IGNORANCE OF TIME FACTOR.
TIME TAKEN FOR THE COMPETITION IS NOT GIVEN PROPER ATTENTION
6.
NOT SUITABLE TO INDUSTRIES
WHERE THE VALUE OF WIP IS HIGH IN RELATION TO TURNOVER.
7.
CAN NOT BE APPLIED TO COST
PLUS CONTRACT UNLESS A HIGH PERCENTAGE FROM THE MC TO COVER FIXED COST
8.
NOT SUITABLE FOR EXTERNAL
REPORTING
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