Decisions involving alternative choices:

MODULE 4

Alternative decisions

• discontinuing a product, • accepting a special order, • make or buy,• Sell or Process further, • Product Mix

Marginal costing

• Marginal costing is a costing technique in which only variable manufacturing costs are considered and used while valuing inventories and determining cost of goods sold.

• So only variable manufacturing costs are considered for product costs.

Advantages of marginal (variable) costing1. Helps in managerial decision making2. Cost control3. Simple technique4. No under and over absorption of overheads5. Constant cost per unit6. Realistic valuation of stocks7. Aid to profit planning8. Valuable adjunct to other techniques

Disadvantages of marginal (variable) costing

1. Difficult analysis2. Ignores time factor3. Difficulty in application4. Less effective in capital intensive industries5. Improper basis of pricing

INCOME STATEMENT (MARGINAL COSTING)SALES XXXXXLESS: MANUFACTURING COSTS 1.Variable production costs: Direct material cost Direct labour cost Variable manufacturing overhead

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COST OF PRODUCTION XXXX

Add: Opening Stock Of Finished GoodsLess: Closing Stock Of Finished Goods

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COST OF GOODS SOLD XXXX

MARGINAL CONTRIBUTION XXXX

LESS: Fixed manufacturing overhead Fixed selling and administrative expenses variable selling and administrative expenses NET PROFIT

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INCOME STATEMENT (ABSORBTION COSTING)SALES XXXXXLESS: MANUFACTURING COSTS 1.Variable production costs: Direct material cost Direct labour cost Variable manufacturing overhead 2. Fixed factory (Manufacturing ) overhead

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COST OF PRODUCTION XXXX

Add: Opening Stock Of Finished GoodsLess: Closing Stock Of Finished Goods

XXXXXXXX

COST OF GOODS SOLD XXXX

ADD (LESS) Under absorption ,(Over absorption)) XXXX

COST OF GOODS SOLD AT ACTUAL GROSS PROFIT ON SALES LESS: Fixed selling and administrative expenses variable selling and administrative expenses NET PROFIT

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