The following points highlight the seven practical applications of differential cost. Some of the applications are:
The following points highlight the top four applications of marginal costing.
Evaluation of Performance 4. Marginal costing divides the total cost into fixed and variable cost. Fixed cost can be controlled by the top management and that to a limited extent. Variable costs can be controlled by the lower level of management.
Marginal costing by concentrating all efforts on the variable costs can control and thus provides a tool to the management for control of total cost. There may be situations where the profits of the concern are decreasing in-spite of increase in sales. If the data is presented on the basis of absorption costing basis, the management may not be able to comprehend the results.
Practical applications of marginal analysis costing analysis will correctly bring out the reasons as to why the profits are decreasing in-spite of increase in sales. Moreover, it should be noted that in marginal costing fixed costs are not eliminated at all. These are shown separately as a deduction from the contribution instead of merging with cost of sales and inventories.
This helps the management to have control on fixed costs also in the long period as these costs are programmed in advance.
|What is 'Marginal Analysis'||The Law of Equi-Marginal Utility or Gossen's Second Law Introduction In social sciences, you often find that there is a wide gap between theories and their practical application. Have you ever thought why it happens?|
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Marginal costing helps the profit planning i. Absorption costing fails to bring out the correct effect of change in sale price; variable cost or product mix on the profits of the concern but that is possible with the help of marginal costing.
Profits are increased or decreased as a consequence of fluctuations in selling prices, variable costs and sales quantities in case there is fixed capacity to produce and sell.
Two businesses, Y Ltd. You are required to: Thus, at sales volume of Rs. In this case Y Ltd. Therefore, in case of low demand breakeven point should be reached as earlier as possible so that the concern may start earning profits.
The different products, departments, markets and sales divisions have different profit earning potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector of a concern.
Performance evaluation is better done if distinction is made between fixed and variable expenses. A product, department, market or sales division giving higher contribution should be preferred if fixed expenses remain same. Elimination of a product. A company manufactures 3 products A, B and C.
There are no common processes and the sale of one product does not affect prices or volume of sales of any other. On the basis of the above the Board had almost decided to eliminate product C, on which a loss was budgeted. Meanwhile they have sought your opinion.
Give reasons for your answer. From the above it is clear that product 0 is contributing Rs. If product C is eliminated the profit of the company will be reduced to Rs.
Hence it is not advisable to eliminate product C. Profitability of a product.The practical usefulness of marginal analysis is easily demonstrated with simple examples that show how managers actually use the technique.
Common applications are to maximize profits or revenue, or to identify the average-cost minimizing level of output.
ADVERTISEMENTS: Differential Cost Analysis: Meaning and Its Practical Applications! Meaning of Differential Cost Analysis: Differential costing is a technique where mainly differential costs are considered relevant.
Differential cost is the difference in total costs between two acceptable alternative courses of action. The alternative actions may . Practical Applications of Marginal Analysis Research Paper IKT Topics in Economics Managerial Economics Practical Applications of Marginal Analysis The most common use of marginal analysis is to find the profit maximizing activity level.
Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs of that activity. analysis represents a practical application of the marginal concept, where the marginal revenues and marginal costs of investment projects are considered on a present value basis.
Use of the NPV technique in the evaluation of alternative investment projects allows managers to apply the principles of marginal analysis in a simple and clear manner. Jul 03, · The law of diminishing marginal utility is helpful to determine the value or price of a commodity.
For example, the law explains that the marginal utility of a commodity decreases as the quantity of it srmvision.coms: 2.