This is a well known concept of economic theory. It may be described as the change in total cost which arises as a result of an increase and decrease by one unit in volume of output. Marginal cost is an amount at any given volume of output by which aggregate costs are changed if the volume of output by which the aggregate costs are changed if the volume of output is increased or decreased by one unit.
Marginal cost is synonymous with variable costs, prime costs plus variable overheads in the short run but, in a way, would also include fixed cost in the planning production activities over a long period of time involving an increase in the productive capacity of business. Thus in decision making problems ,marginal costs are related to change in output under particular circumstances of a case.
Theoretically marginal cost and differential cost are the same. If there is no change in fixed cost then both these cost will be same. Thus marginal cost does not include fixed cost at all whereas differential cost may include an element of fixed cost as well if fixed cost changes due to a decision.
Marginal costing is a very important technique of decision making. It is a comparatively new area in the field of accounting but it is gradually gaining more and more acceptance. It is the method of matching cost with revenue to determine periodic income. It is the ascertainment of marginal cost and of the effect on profit of changes on volume or type of output by differentiating fixed costs and variable cost. In this context it is to be noted that it is not a system of costing like process or job costing but it is simply an approach to the presentation of accounting information meaningful to management. in this all cost are segregated into fixed and variable components. only the variable costs are regarded as product cost and are used to value inventory and cost of goods sold.. the fixed cost are treated as period cost and are charged directly to profit and loss account. thus no part of fixed manufacturing cost is deferred to the next period as inventory. while preparing a profit and loss account on marginal costing basis, the variable or marginal cost of sales is deducted from sales valuemand the difference is termed as contribution margin.
Marginal costing application in managerial decision making:
The technique of marginal costing is a valuable aid to management in taking various policy decisions. Following are the few problems where managerial costing analysis is useful:
1) Pricing of products: product pricing is usually considered to be a difficult problem,particularly in non-repetitive production. the problem iss to equate the demand and supply in such cases marginal costing is very helpful. This technique can help management in fixing prices in such circumstances:
a) A trade depression in industry
c) A seasonal fluctuations.
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