by Under marginal costing, costs are divided into two categories: variable costs and fixed costs. Variable costs are those costs that vary with changes in the level of production or sales, such as raw materials, direct labor, and variable overheads. Fixed costs, on the other hand, remain constant regardless of the level of production or sales, such as rent, salaries, and depreciation.
To determine the cost and profit under marginal costing, we need to use the following formulas:
Total Variable Cost:
Total Variable Cost = Variable Cost per unit x Number of units produced
Total Cost:
Total Cost = Total Variable Cost + Total Fixed Cost
Contribution Margin:
Contribution Margin = Selling Price per unit – Variable Cost per unit
Total Contribution:
Total Contribution = Contribution Margin x Number of units sold
Profit or Loss:
Profit or Loss = Total Contribution – Total Fixed Cost
Let’s take an example to understand how to determine the cost and profit under marginal costing:
Example:
A company produces and sells a product at a selling price of $50 per unit. The variable cost per unit is $30, and the fixed costs are $100,000. The company produces and sells 10,000 units in a year. Calculate the total cost and profit under marginal costing.
Solution:
Using the formulas mentioned above, we can calculate the total variable cost, total cost, contribution margin, total contribution, and profit or loss as follows:
Total Variable Cost = Variable Cost per unit x Number of units produced
Total Variable Cost = $30 x 10,000 units
Total Variable Cost = $300,000
Total Cost = Total Variable Cost + Total Fixed Cost
Total Cost = $300,000 + $100,000
Total Cost = $400,000
Contribution Margin = Selling Price per unit – Variable Cost per unit
Contribution Margin = $50 – $30
Contribution Margin = $20
Total Contribution = Contribution Margin x Number of units sold
Total Contribution = $20 x 10,000 units
Total Contribution = $200,000
Profit or Loss = Total Contribution – Total Fixed Cost
Profit or Loss = $200,000 – $100,000
Profit or Loss = $100,000
Therefore, the total cost of production is $400,000, and the company makes a profit of $100,000 under marginal costing.
In conclusion, marginal costing provides a clear picture of the costs and revenues associated with each unit of production, making it easier to determine the cost and profit. By separating fixed and variable costs, marginal costing helps businesses make better decisions about pricing, production, and profitability, leading to improved efficiency and profitability.
Make or by Decision
Make or Buy decision is a common business decision that involves deciding whether to produce a product or service in-house (make) or to purchase it from an external supplier (buy). The decision-making process involves analyzing various factors such as cost, quality, delivery time, production capacity, and availability of resources.
The make or buy decision is an important decision for businesses as it can affect their profitability, competitiveness, and market share. Here are some steps involved in the decision-making process:
Define the problem and gather information:
The first step in the decision-making process is to define the problem and gather information about the product or service, its cost, quality, and production process. This information can be obtained from internal sources such as production data or from external sources such as suppliers and industry reports.
Analyze the costs:
The next step is to analyze the costs associated with producing the product or service in-house and the costs of purchasing it from an external supplier. This includes analyzing the direct and indirect costs, such as labor, materials, equipment, overheads, and taxes.
Analyze the quality:
Quality is a critical factor in the make or buy decision. Businesses must assess the quality of the product or service produced in-house and compare it with the quality of the product or service offered by external suppliers.
Analyze the production capacity:
Production capacity is another important factor to consider in the make or buy decision. Businesses must assess their production capacity and compare it with the demand for the product or service. If the demand exceeds the production capacity, it may be more cost-effective to purchase the product or service from an external supplier.
Analyze the availability of resources:
The availability of resources such as skilled labor, equipment, and raw materials also plays a crucial role in the make or buy decision. Businesses must analyze the availability of these resources and compare it with the requirements of producing the product or service in-house.
Evaluate the alternatives:
After analyzing all the factors, businesses must evaluate the alternatives and decide whether to produce the product or service in-house or to purchase it from an external supplier. The decision must be based on the factors that are most critical to the business such as cost, quality, production capacity, and availability of resources.
Selection of most Profitable channel
Selecting the most profitable channel using marginal costing involves analyzing the variable costs associated with each channel and calculating the contribution per unit for each channel. Here are some steps involved in selecting the most profitable channel using marginal costing:
Identify the channels:
The first step is to identify the different channels through which the product or service can be sold. This includes channels such as direct sales, online sales, and sales through intermediaries.
Calculate the variable costs:
The next step is to calculate the variable costs associated with each channel. Variable costs include direct materials, direct labor, and variable overheads.
Calculate the contribution per unit:
The contribution per unit is the difference between the selling price and the variable cost per unit. Businesses must calculate the contribution per unit for each channel.
Analyze the breakeven point:
The breakeven point is the point at which the total revenue equals the total costs. Businesses must analyze the breakeven point for each channel. This helps to determine the volume of sales required to cover the total costs.
Evaluate the alternatives:
After analyzing the breakeven point and the contribution per unit for each channel, businesses must evaluate the alternatives and decide which channel is the most profitable. The decision must be based on the factors that are most critical to the business such as cost, quality, production capacity, and availability of resources.
Review the decision:
After making the decision, businesses must review it periodically to ensure that it is still the most cost-effective option. This involves monitoring the variable costs, the contribution per unit, and the breakeven point for each channel.
