project on marginal costing and decision making pdf

Project on marginal costing and decision making pdf

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Principles of Cost Benefit Analysis

Value Added Tax as Medium Of Generating Funds

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Principles of Cost Benefit Analysis

Marginal costing is the ascertainment of marginal costs and of the effect of changes in volume or type of output by differentiating between fixed costs and variable costs.

Marginal costing is not a method of costing such as job costing, process costing and operating costing, etc. It brings out the relationship between the cost, volume of output and profit. Other terms in use are Direct costing which is used in U. Marginal cost is defined as the amount at any given volume of output by which aggregate costs are changed, if the volume of output is increased or decreased by one unit. It is the sum total of prime cost plus variable overheads plus variable portion of semi-variable overheads.

Marginal cost is also termed variable cost, direct cost, activity cost, volume cost or out-of-pocket cost. Constant in nature — Variable costs fluctuates from time to time, but in the long run, marginal costs are stable.

Marginal costs remain the same, irrespective of the volume of production. Effective cost control — It divides cost into fixed and variable. Fixed cost is excluded from product. As such, management can control marginal cost effectively. Treatment of overheads simplified — It reduces the degree of over or under-recovery of overheads due to the separation of fixed overheads from production cost. Uniform and realistic valuation — As the fixed overhead costs are excluded from product cost, the valuation of work-in-progress and finished goods become more realistic.

It is helpful in determining which is profitable whether to buy or manufacture a product. The management can take decision regarding pricing and tendering. Helps in production planning — It shows the amount of profit at every level of output with the help of cost volume profit relationship.

Here the break-even chart is made use of. Better results — When used with standard costing, it gives better results. Fixation of selling price — The differentiation between fixed costs and variable costs is very helpful in determining the selling price of the products or services. Sometimes, different prices are charged for the same article in different markets to meet varying degrees of competition.

Helpful in budgetary control — The classification of expenses is very helpful in budgeting and flexible budget for various levels of activities. Preparing tenders — Many business enterprises have to compete in the market in quoting the lowest price.

Any price above this floor price may be quoted to increase the total contribution. The decision to purchase it would be taken if the price paid recovers some of the fixed expenses.

Better presentation — The statements and graphs prepared under marginal costing are better understood by management executives.

The break-even analysis presents the behaviour of cost, sales, contribution etc. And, thus the results can easily be grasped. Difficulty to analyse overhead — Separation of costs into fixed and variable is a difficult problem. In marginal costing, semi-variable or semi-fixed costs are not considered. Time element ignored — Fixed costs and variable costs are different in the short run; but in the long run, all costs are variable.

In the long run all costs change at varying levels of operation. When new plants and equipment are introduced, fixed costs and variable costs will vary. Unrealistic assumption — Assumption of sale price will remain the same at different levels of operation. In real life, they may change and give unrealistic results. Difficulty in the fixation of price — Under marginal costing, selling price is fixed on the basis of contribution.

In case of cost plus contract, it is very difficult to fix price. Complete information not given — It does not explain the reason for increase in production or sales. Significance lost — In capital-intensive industries, fixed costs occupy major portions in the total cost. But marginal costs cover only variable costs. As such, it loses its significance in capital industries. Problem of variable overheads — Marginal costing overcomes the problem of over and under-absorption of fixed overheads.

Yet there is the problem in the case of variable overheads. Sales-oriented — Successful business has to go in a balanced way in respect of selling production functions. But marginal costing is criticised on account of its attaching over- importance to selling function.

Thus it is said to be sales-oriented. Production function is given less importance. Unreliable stock valuation — Under marginal costing stock of work-in-progress and finished stock is valued at variable cost only. No portion of fixed cost is added to the value of stocks.

Profit determined, under this method, is depressed. Claim for loss of stock — Insurance claim for loss or damage of stock on the basis of such a valuation will be unfavourable to business. Automation — Now-a-days increasing automation is leading to increase in fixed costs. Marginal costing, if applied alone, will not be much use, unless it is combined with other techniques like standard costing and budgetary control. The advantages to be gained from a system of marginal costing may be summarised as follows:.

Valuable Aid to Management — The most useful contribution of marginal costing is the assistance it renders to the management in vital decision-making. In marginal costing system, the cost data required for decision-making and profit planning is readily available from accounting records. A few of the managerial problems that are simplified by the use of marginal costing are — make or buy decisions, pricing of products, selection of a suitable sales mix, choosing from among alternative methods of production, etc.

Facilitates cost control — By separating the fixed and variable costs, marginal costing provides an excellent means of controlling costs. Avoids arbitrary apportionment of overheads — Marginal costing avoids the complexities of allocation and apportionment of fixed overheads which is really arbitrary.

Basis for pricing — Marginal costing furnishes a better and more logical basis for fixation of selling prices and tendering for contract particularly when business is dull.

Relative Profitability — In case a number of products are being manufactured, marginal costing facilitates the study of relative profitability of different products. It will show where the sales effort should be concentrated so that overall profits position may be improved.

Realistic valuation of stock — In marginal costing stocks of finished goods and work-in-progress are valued at their variable cost only. Valuable adjunct to other techniques — Marginal costing is a valuable adjunct to budgeting and standard costing techniques. Marginal costing suffers from the following limitations:. Difficulty in Analysis — It may be very difficult in practice to segregate all costs into fixed and variable.

Moreover, certain expenses are purely caused by managerial decisions and cannot be strictly classified as fixed or variable, e. Difficulty in Application — The technique of marginal costing is difficult to apply in industries like shipbuilding, contracts, etc.

Thus, if fixed overheads are not included in the closing value of work-in-progress, losses on contracts may result every year, while on completion of contract there may be large profits. Improper Basis for Pricing — In marginal costing prices are based on contribution which does not cover fixed costs. This may prove dangerous in the long run. Ignores Time Factor — In marginal costing time factor is ignored.

For instance, the marginal cost of two jobs may be identical, but if one job takes twice as long to complete as the ether, the true cost of job taking longer time is higher than that of the other. This is not disclosed by marginal costing.

Less Effective Cost Control — Marginal costing ignores the fact that fixed costs are also controllable. By placing fixed overheads in a separate category, the importance of their controllability is reduced.

Moreover, marginal costing is not as effective as standard costing and budgetary control in controlling costs. Limited Scope — With the increased use of automatic machinery the proportion of fixed costs maintenance, depreciation etc. As marginal costing ignores fixed costs, this system becomes less effective in capital intensive industries.

Unrealistic Statements — The exclusion of fixed overhead from stock valuation affects the Profit and Loss Account and also produces an unrealistic Balance Sheet. The following are the advantages of marginal costing:. This is because of the exclusion of fixed costs and the associated arbitrary allocation of overheads. Cost comparison becomes meaningful. Besides being a measure of performance, contribution is a more reliable measure of decision-making, both tactical and strategic.

The technique is also of immense use in making cost-volume-profit analysis. Such segregation assists management in exercising control over expenditure. It is, in other words, an instrument of cost control. Management is enabled to compare the actual variable expenses with the budgeted variable expenses and take corrective action through analysis of variances.

As such, responsibility accounting becomes more effective when it is based on marginal costing. This information is immensely useful in budgeting and production planning. In spite of the above advantages of marginal costing, the technique suffers from the following limitations:.

Since marginal costing is the ascertainment of marginal cost and the effect on profit of changes in the volume or type of output by differentiating between fixed costs and variable cost, it is absolutely necessary to segregate the expenses into fixed and variable items. However, it is not that easy to segregate the expenses.

Most of the expenses are neither totally variable nor wholly fixed. As such, the expenses are to be separated with reasonable accuracy. Otherwise, the technique ceases to be accurate. Although fixed costs are independent of production because of the fact that they accrue on time basis, there is no justification for excluding them from the purview of product costing since they also contribute to production.

In modern times when production is highly mechanised, fixed costs are incurred in larger proportion than the variable costs in many industries. In large contracts in particular, fixed costs cannot be excluded while valuing work-in- progress in order to show the correct position of the contract.

Value Added Tax as Medium Of Generating Funds

Marginal costing is the ascertainment of marginal costs and of the effect of changes in volume or type of output by differentiating between fixed costs and variable costs. Marginal costing is not a method of costing such as job costing, process costing and operating costing, etc. It brings out the relationship between the cost, volume of output and profit. Other terms in use are Direct costing which is used in U. Marginal cost is defined as the amount at any given volume of output by which aggregate costs are changed, if the volume of output is increased or decreased by one unit. It is the sum total of prime cost plus variable overheads plus variable portion of semi-variable overheads. Marginal cost is also termed variable cost, direct cost, activity cost, volume cost or out-of-pocket cost.

These projects may be dams and highways or can be training programs and health care systems. The idea of this economic accounting originated with Jules Dupuit, a French engineer whose article is still worth reading. This act required that the U. Corps of Engineers carry out projects for the improvement of the waterway system when the total benefits of a project to whomsoever they accrue exceed the costs of that project. Thus, the Corps of Engineers had created systematic methods for measuring such benefits and costs.

This is entirely my own work. I owe a great many thanks to great many people who helped and supported me doing the writing of this book. My deepest thanks to lecturer, Prof. He has taken pains to go through my project and make necessary corrections as and when needed. My deep sense of gratitude to Principal Mrs. I would also thank my institution and faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well-wishers.

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See all EU institutions and bodies. Fair and efficient pricing of transport infrastructure use is a fundamental aspect of developing a sustainable transport policy that takes account of the full social costs and benefits of transport. UNITE will supply policymakers with the framework and state-of-the-art cost estimates to progress this policy. For transport accounts, examples of accounts for multiple modes are available for Germany, France and Switzerland, whilst focusing on the road sector, the UK Road Track Cost and USA Federal Highway Cost Allocation Study provide illustrations of attempts to compare costs with revenues for individual vehicle classes.

This project is a survey that aims at exploring the importance of marginal costing as an essential tools for decision making in manufacturing company bearing in mind their immense contribution for quick decision making to determine the efficiency and effectiveness of marginal costing, the following are put into consideration. How management decision is carried out in marginal costing,To find out the inherent deficiencies in its applications,To help in determining the criteria for cost control and analysis, How product decisions are made by the management under this techniques. In the course of investigation, data were obtained through questionnaires administered to the management staff and few from the senior staff of Emenite Nig Ltd Enugu who have knowledge about the techniques under review. Some information were got from internet the collected data were classified, analyzed and interpreted by discussion and analysis.

UNIfication of accounts and marginal costs for Transport Efficiency

The following points highlight the top nine cost concepts used in decision making. The cost concepts are: 1. Marginal Cost 2.

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The researcher reviewed literatures done by other authors for the purpose of this study. Data were collected from questionnaire and other information gathered were presented on tables, analyzed and conclusion drawn from percentage variations. The research findings includes marginal costing techniques is well adopted by ANAMMCO as a result of its efficiency and effectiveness in operation. The response conclude that this techniques is very essential in organization, though no particular costing technique is in itself a lasting panacea to all organizational ailment or problems but depends on what the management needs. The researcher recommends for the provision of raw materials in advance, which will assist in reduction of customers dissatisfaction. The reality of modern business management in a free enterprise economic system is the level of competition among all the enterprise, where only the fittest enterprises survive. The measure objective of every organization is profit maximization.

Accurate cost measurement is critical to properly pricing goods or services. Businesses with accurate cost measurement know whether they are making a profit on current goods and know how to judge potential investments, new products or other opportunities. Using the correct costing method for the opportunity is a primary focus of effective cost accounting and financial control.

Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Incremental Cost Vs. Marginal Cost

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