7 Marginal Costing

Amity Business SchoolMANAGEMENT ACCOUNTING The Chartered Institute of Management Accounting (CIMA) of UK has defned Management Accounting asManagementAccountingisanintegralpartof managementconcernedwithidentifyingpresenting and interpreting information used for !ormulating strategy "lanning and controlling acti#ities $ecision ma%ing &ptimising the use of resources $isclosurestoshareholdersandothere'ternaltothe entity $isclosure to employeesAmity Business SchoolTOOLS and TECHNIQUES USED IN MANAGEMENT ACCOUNTING (ome of the tools used in Management Accounting are)a) *atio Analysis+) Comparati#e !inancial (tatementsc) !unds !low (tatementd) Cash !low (tatemente) (tandard costing and #ariance Analysisf) Marginal costing and C," Analysisg) -udgetingh) *esponsi+ility Accountingetc.Amity Business SchoolMARGINAL COSTINGTherearetwotechni/uesofproductcostingandincome determination0a) A+sorption costing+) Marginal CostingAbsorptioncostingisatotalcosttechni/ueunder which total cost (f'ed cost and #aria+le cost) is charged as production cost.UnderMarginalCostingonly#aria+lecostsare chargedasproductcostsandincludedinin#entory #aluation.!i'edmanufacturingcostsarenotallottedtoproducts +utareconsideredasperiodcostsandthuscharged directly to "roft and loss Account.

Amity Business SchoolMARGINAL COSTINGTheaccountingsysteminwhich#aria+lecostsare chargedtocostunitsandf'edcostsoftheperiodare writteno1infullagainstaggregatecontri+ution.Its special #alue is in decision ma%ing.2CIMA 3ondonAmity Business SchoolASSUMPTIONS OF MARGINAL COSTING4 All costs can +e separated into f'ed and #aria+le cost4 ,aria+lecostperunitremainsconstantandtotal #aria+le cost #aries in direct proportion to the #olume of production4 Total f'ed costs remain constant4 (elling price does not change as #olume changes4 There is synchroni5ation +etween production and sales. Thisimpliesthat#olumeofproductionand#olumeof salesAmity Business SchoolCVP ANALYSISC,"Analysisisane'tensionoftheprinciplesofMarginal costing.C," analysis studies the relationship +etween cost #olume and proft.0 Cost of production0 ,olume of production 6 sales0 "roftCIMA3ondonhasdefnedC,"Analysisasthestudyof thee1ectsonfutureproftsofchangesinf'edcosts #aria+le cost sales price /uantity and mi'2Amity Business SchoolContributionContri+utionisthedi1erence+etweensalesandthe #aria+le cost.Contri+ution 7 (ales 8 ,aria+le CostContri+ution 7 !i'ed cost 9 "roft!or e'ample) (ales 7*s :;