The strategy of marginal costing requires the following steps:
a)Differentiation between your fixed costs and variable costs b)Ascertainment of marginal costs and c)Determining the result on profit because of alterations in volume or kind of output i.e. the resolution of cost-volume-profit relationship.
The steps involved with marginal costing are described as below: a)Distinction between fixed costs and variable costs: Marginal costing technique requires the segregation of costs into fixed costs and variable costs. The expense might be split into fixed costs, variable costs and semi fixed or semi variable costs. Fixed cost might be understood to be an expense which has a tendency to remain untouched in aggregate by alterations in the level of output. Fixed cost is generally known to as period costs because they are incurred based on time and don’t vary directly with volume or rate of output for example rent, rates, insurance premium etc.
The variable cost might be understood to be an expense which has a tendency to alternation in aggregate in direct proportion to alterations in output. The variable costs mainly rely on output and therefore are sometimes known to as direct costs. The good examples of variables cost is direct material cost, direct wages, direct expenses etc. Semi variable cost or semi fixed price is an expense that is partially fixed and partially variable. It has a tendency to alternation in aggregate with alterations in amount of output although not directly compared to such changes. The good examples of semi variable cost is repairs and maintenance, price of supervision etc.
b)Ascertainment of marginal cost: Underneath the marginal costing technique only variable cost is put on items. The price of production may be the marginal price of production and the price of sales may be the marginal price of sales. The marginal cost refers back to the aggregate of prime cost and all sorts of variable expenses. The best price is the aggregate of direct material cost, direct wages and direct or chargeable expenses. All variable expenses means variable expenses as well as the variable part of semi variable expenses. Semi variable expenses are partially fixed and partially variable and need segregation into fixed and variable elements.
The variable portion is put into fixed expenses thus developing a part of marginal cost whereas the fixed portion is put into fixed expenses and also the total fixed expenses are treated separate costs. These separate costs are based on some time and hence are classified as period costs. The primary problem to some cost accountant would be to segregate the semi variable overhead into fixed and variable elements. The segregation or separation of semi variable overhead into fixed and variable elements can be achieved by implementing various techniques for example comparison method. The everywhere points method, equation method, earnings method, graphical method or least square method.
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