Marginal Costing as a Tool for Decision Making

Negative externalities are costs imposed upon an individual or group that is outside or external to a transaction.

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.

Externality is defined as an effect of a decision on a third party not taken into account by the decision maker. There are two types of externalities being positive and negative. Second hand smoke would be a negative externality. The smoker does not take into account the smoke emitted from their cigarette. Education would be considered a positive externality. When an individual is educated, their

A cost of goods is what it should spend to make products. At the start of each period budget of production will be ready, using cost of goods and predicted production quantities. At the end of each period a variance report is prepared to compare the budget costs with the actual costs.

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

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).

According to this method, every unit of the product is assigned all direct, fixed, and variable costs. This method includes the cost of direct materials and labor as well as a portion of the overhead costs associated with it in the final costing of every unit of the product.

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.

For this scenario, the company is looking to grow themselves by adding more sales personnel to the force. They would like to expand from sixty sales person to seventy-seventy five total sales personnel. The addition of 10 to 15 employees. It?s recommended to consider marginal cost when doing this. Marginal cost will be used to measure the additional cost of one or more personnel. For this example, you

1.The firm’s production function is the relationship between the quantity of labor used in the production and the quantity of output. Marginal product of labor is increase in the amount of output from an additional unit of labor. The value of a marginal product is the marginal product of labor that multiply by the output of market price.

Process costing is an easier system to use when costing homogenous products compared to other cost allocation methods. Each process applies direct materials, labor and manufacturing overhead to the production cost total. Management accountants take the total number of goods leaving the process and divide the total process cost by this number. This creates a simple average cost for each item produced. Another advantage is that business owners use process costing because it creates a flexible production process. Companies needing to refine their process can simply add or remove a process as necessary. This also allows companies to lower their production cost for each good. Adding a process allows companies to produce slightly different goods or improve product quality. This flexibility ensures companies can produce at the most competitive cost in the economic marketplace. Also process costing provides an approach to allocate costs to

INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to

An Externality is when costs or benefits of certain activities spill or fall into third parties that have nothing to do with the initial situation in hand; its like a side effect or consequence of an activity that affects other parties who did not choose to incur that cost or benefit.

Marginal costs are the amount that the total cost will alter for Sony by manufacturing one additional unit of productivity. Marginal costs are generated by variable costs only. The law of diminishing infers that Sony’s marginal cost will increase as productivity increases. Sony’s increasing