Marginal Costing

Marginal Costing:

In our day to day life we come across lot of activities. It is essential to know about the costing for making our life easier and more beneficial. Let us understand the concept of marginal costing. I hope many of us may really not know much on this. We may know that it is a cost or some amount of money charged on a product.

To understand this well, I will start with a simple example.  Let us say, I have an ice cream shop and I manufacture 10000 cups of ice creams for 50000 Rs. Later I get an order for the same to manufacture 10001 cups of ice creams for 50002 Rs.

10000 cups – 50000 Rs so each will cost 5 Rs

10001 cups – 50002 Rs – here the extra one cup – will cost 2 Rs- this 2 Rs is considered as marginal cost.

So this additional cup was costing only for Rs. 2 and it did not cost more because it was only the variable cost and fixed cost such as salary, set up fees, insurance, tax will not increase when another additional unit is produced. Here can see that even though you manufacture additional units the cost is less and is beneficial.

One more example to make you understand better:

Everyone is now more conscious of their health and fitness. Many people want to go to gym for reducing weight. So let us say that you go to gym for 3 times a week due to time constraint and thinking of adding 2 more times, you would use marginal analysis. You will think whether going for extra 2 more days will help in reducing the weight or doing house hold work or weekend activities having less food will help. Marginal analysis is to analyze the additional benefits something in comparison of additional cost.

 If I have to take up a decision then I think a lot how will I spend my next one hour and also I will think how will I spend my one rupee. I will think of spending it at a less cost and look for more benefits. 

Let us solve a simple problem on marginal costing

Marginal cost = Total cost /Total out put 

A factory produces 500 mobiles per annum. The variable cost per mobile Rs.50 . The fixed expenses are Rs.10000 per annum. Thus the cost sheet of 500 mobiles will appear as:

Variable cost( _______* 50)                = 25000

Fixed cost                                                  ________

Total    =                                                     _________

If production is increased by one unit i.e. it becomes 501 fans per annum, the cost sheet will appear as:

Variable cost( _______* 50)                = _______

Fixed cost                                                  ________

 Marginal cost will be =                          _________