Advantages And Limitations Of Marginal Costing

The total cost of production of Sony’s new product is the addition of both fixed and variable costs. Fixed costs are assets within a business that are not used up or sold during the typical production course e.g. buildings and machinery. Variable costs are costs that fluctuate in time with the production output or sales revenue of a company such as Sony e.g. raw material and labour costs. Figure 1.1 shows how the total cost is composed of both fixed and variable costs.

Objective: Analyze the effect of changes in marginal revenues and costs on a firm’s profit-making potential.

In this paper I am going to explain some of the key terms that companies need to keep in mind when operating their business. First, we will start with marginal revenue, which is defined simply as the extra revenue that is made for each additional unit of a product that is sold. This is directly related to marginal cost, which is what it costs the company to make that additional unit of product.

The Marginal Cost graph intersects the Average Total Cost graph and the Average Variable Cost graphs at their minimum points. As long as the cost of producing one additional unit remains less than average total cost, the average total cost continues to fall. When marginal cost finally exceeds average total cost, average total cost begins to rise in response. The same effect applies to the relationship between marginal cost and average variable cost.

In comparison, the marginal cost is the added cost of producing one more unit of output. It is determined by the change in total cost (TC) divided by the change in output (Q). MC= TC/Q. In the provided scenario, for Company A to produce one widget TC=$30, to produce two widgets TC=$50 thus the marginal cost was $20; furthermore the cost per widget to produce was $25. Marginal cost will continue to decrease for Company A until they reach their profit maximization of $42.86 per widget at 7 widgets. Marginal cost will then begin to decrease for every additional widget produced until the end result of 15 widgets with a MC that exceeds $80, also allowing TC to topple to TR ($1220/15=$81.33).

* Marginal Cost – The opportunity cost that arises from an increase in that activity

The second and final option is to analyze marginal revenue and marginal cost. This process is done by comparing the amount each additional unit of output is costing and adding it to the total revenue and total cost. Unfortunately, this information was not made available for this

A way to determine the quantity of profit maximization is to conclude where marginal revenue equals marginal costs. Rather than computing the profit for all levels of sales; total revenue and total variable costs are considered. Marginal revenues and marginal costs are considered in a similar way like marginal profit, thus defining the amount of change for all sales’ levels (Huter, 2012, p.2).

14. When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT: (Points: 2)

The following annotated bibliography includes a list of references that address cost measures, direct and indirect costs and pricing systems. Cost accounting systems are well-developed for tangible goods. Accounting principles are applied to businesses for financial reporting to analyze the profitability of the business. Direct and indirect costs is the basis to setting regulated prices on products.

Preparing different income statements captures information in diverse ways to facilitate decision making on internal matters. The management needs to understand cost behavior in order to control the costs. Besides the production costs, changing sales patterns affects profitability and there is a need to achieve better sales accuracy after understanding cost behavior. Variable costing also captures information about the impact of changing operation on profitability and the management is better placed to make pricing decisions to maximize

The basic difference between absorption and variable costing relates to the handling of fixed manufacturing

All the costs by a company can be broken into two categories, fixed costs and variable costs. Costs that are independent of output are called fixed costs. Fixed costs remain constant throughout the relevant range and are usually considered sunk for the relevant range. Buildings and machinery are included inputs that cannot be adjusted in the short term. They are only fixed in relation to the quantity of production for a certain time period. The cost of all inputs is variable, in the long run.

marginal cost – so that the sale still produces a positive contribution to fixed costs.

The essential relationship between fixed and variable costs is the same whether the budget is static or flexible. The key is that in the flexible budget, both fixed and variable costs are subject to change. In most cases,