Historical Development of Marginal Costing
Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.
The concept of marginal utility grew out of attempts by economists to explain the determination of price. The term “marginal utility”, credited to the Austrian economist Friedrich von Wieser by Alfred Marshall. (Marshall, n.d.) Then, William Stanley Jevons first proposed the theory in “A General Mathematical Theory of Political Economy”, a paper presented in 1862 and published in 1863. He differed
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Advantage and disadvantage
In accounting system, as a method of tallying the costs it takes to produce goods, marginal costing has numerous obvious advantages and disadvantages.
1.Help to increase the scale of business & decision making.
Enlarging the operation scale is a indispensable way for manufactures when developing a company. Once fixed cost was determined, the more units produced, the more efficient that production becomes. Marginal costing is a very effective way of measuring whether economies of scale are saving the business capital. It perfectly avoids manipulation of short-term profit, overcoming the shortcoming of the full cost method, making significant contribution to short term production decisions. The following example will present this merit clearly:
One enterprise produce one kind of sandwich.
Fixed cost Variable cost unit
Produce process 400 2.2 1000
Selling process 100 0.3 600
Selling price is 4 pounds per unit.
By using marginal costing, it is easy to calculate the net profit is 400 pounds. However, the result will be 560 if we use full costing. Thus, under the marginal costing, profit is strongly related to sale quantity rather than produce quantity. The difference (160 pounds) between these two methods is from the inventory product’s fixed cost. It is apparent that fixed cost should be ignored when making produce (or input) quantity decision due to fixed cost is irrelevant to produce quantity. By avoiding arbitrary
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.
When a firm wants to determine its optimal level of output using marginal revenue and marginal cost the firm needs these two to be equal. Marginal revenue is a change in the total revenue when one or even more units of output are sold. Marginal cost is the cost associated with producing one or more units. Optimal level of output is the desired level of goods or even service that is produced by a company. When the revenue and the cost become equal then the firm that uses profit maximization to determine the optimal level of output has succeeded.
Second, the manufacturing order costs for non-stocked items was calculated by dividing total manufacturing order costs for non-stocked items by the number of orders for non-stocked products. Non-stocked products have additional costs associated with processing orders that went above and beyond the costs associated with a stocked product. The third step involved determining what the S"A allocation factor would be for calculating the S"A volume related costs. This allocation factor would then be applied to manufacturing COGS. The fourth and final step involved the calculation of the operating profit based on backing out volume related costs from sales revenues followed by deducting S"A and manufacturing order costs from the resulting gross margin to arrive at a operating profit.
The Marginal Cost graph is a function of change in total cost divided by change in quantity produced. Marginal cost is the added cost of producing one additional unit of production, or the savings in not producing one additional unit. The graph decreases until the fourth unit of production, and then increases rapidly, as marginal cost is tied to total cost and is thus subject to the law of diminishing returns.
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).
The year is 2325 and this researcher has come upon a time capsule entombed beneath a long forgotten memorial in Washington D.C. When this researcher opened the time capsule there was a note dated December 31, 1969 that read “Within this time capsule is evidence of a time gone by but within it is our hope for the future and we are hoping that whomever reads this in the future sees that our ideas about a peaceful, accepting and proud America have held true in the time that you open this humble box”.
1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt
This article discussed variable costing, what is primarily used for and applicability in manufacturing situations. Cost accounting supplies management with the necessary information for decision making (Hasan, 2016). The appropriate costing of a product is essential in taking appropriate managerial decisions (Hasan, 2016).
According to Buitelaar (2004), this involves the cost of accessing to market information that would reduce uncertainty. Information such as prices, quality, research into residential preferential, comparison of brands and different suppliers incurred money, time and effort. Generally, any cost of production would include production and transaction costs, whereas the latter include cost of acquiring information and institutional costs (Buitelaar, 2004).
In addition, it wrongly allocated its indirect costs at volume bases. The use of process technology mentioned in the case led to an increase in factory overheads Since direct labor hours was not a cost driver of them, allocating its large proportion of fixed factory overheads and other indirect batch-level costs on the basis of DLHs in this cost system did not accurately measure how resources were being used. As a result, these inaccurate allocations would have significant costs to Elkay. Moreover, it disregarded its cost structure in which most costs were “fixed” that would not vary in the short run and should be allocated based on its practical capacity. By using the “actual sales volume” as the allocation base for allocating its large corporate overheads, this standard costing system in fact over-pricing its products for its actual productivity was lower than the practical capacity under the intense competition. As a consequence of all problem within the standard costing system, PPD urgently needed an accurate costing system.
The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production
LECTURE OUTLINE 1 2 2.1 2.2 2.3 2.4 2.5 2.6 3 3.1 3.2 3.3 INTRODUCTION SHORT-RUN THEORY OF COST Distinction between fixed cost and variable cost Total cost Marginal cost Average cost Relationship between marginal cost and average cost Optimum capacity LONG-RUN THEORY OF COST Cost minimisation in the long run Long-run average cost Productive efficiency
Indeed, both authors agreed that propaganda is so effective because everybody is prone to it. Cross believe it is fundamental for the society to become knowledgeable about the strategies and practices of the propaganda “let us become informed about the methods and purposes of propaganda, so we can be the masters, not the slaves of our destiny.” (Cross 257). For example, the Vietnam war ended because people just went out and spoke against it. Even though, the government had overwhelmed propaganda for the war. And the people were able to turn the tie against the government desires.
Even when the demand for an operations products can be reasonably well forecast, the inherent uncertainty in all estimates of future demand may inhibit the business from investing capital to meet the most likely level of demand. Contrastingly, this principle can be linked to the concept of economies of scale. For BCF the addition of one unit of capacity i.e. from the extra capacity provided by the conventional technology option, the total fixed costs per unit of potential production output will decrease. For the new technology option, the addition of one unit of capacity will increase unit costs – a diseconomy of scale. Initially, this claim is based on the capital cost of implementing the new technology option, as well as diseconomies of over using capacity having the effect of increasing unit costs above a certain level of output. As a result, more operations activities
While the media coverage of the presidential election as a game has given the media a great deal of power in deciding who the president will be, the media does not choose who they will cover extensively based on who they believe the best president will be. It has been said that, “It’s not that journalists sit back and decide to put their finger on the scale in a way deliberately intended to help a candidate who captures their fancy. They are in it for the story, though the political impact is real enough” (Patterson, “News Coverage of the 2016 Presidential Primaries: Horse Race Reporting Has Consequences). Additionally, Politicus USA stated that,