MARGINAL COSTING

Marginal Cost-

Definition- The cost of one unit of product or service that would be avoided if that unit were not produced or provided.

Marginal Costing –

The accounting system in which variable cost are charged to the cost units and fixed costs of the period are writing off in full against the aggregate contribution. Its special value is in decision-making.

Break Even Point- Break even point is the point of sale in which the company makes neither profit nor loss. The marginal costing technique is based on the idea that difference of sale and variable cost of sales provides for a fund which is referred to as contribution. Contribution provides for fixed cost and profit. At break even point, the contribution is just sufficient to provide for fixed cost. If actual sake level is above break even point, the company will make profit. If actual sale level is below break even point the company will incur loss. When cost volume profit relationship is presented graphically and it is the point at which total cost line and total sale line intersect each other will be the point of break even point.

Key Factor or Limiting Factor-

Key factor is the factor whose influence must be first ascertained to ensure that there is maximum utilization of resources. Gearing the production process in the light of key factor’s influences will lead to maximization of profits. Key factor contains managerial action and limits output of the company. Generally sale is the limiting factor, but any of the following factors can be limiting factor.

a) Materials

b) Labour

c) Plant & machinery

d) Power

e) Government action.

When a limiting factor is in operation and a decision is to be taken regarding relative profitability of different products, contribution for each products is divided by key factor to select the most profitable alternative.