Analysis of Marginal Costing and its Impact on Business Performance

Desklib provides past papers and solved assignments for students. This report analyzes marginal costing and its impact on business performance.

Managing Business Performance
1

Contents
4.......................................................................................................................................................3
Introduction..................................................................................................................................3
Conclusion...................................................................................................................................5
References........................................................................................................................................6
2

4.
Introduction
This question includes the analysis of the data produced above and the impact of changes made
above on the selling price and variable cost of the proposed business. Also in the second part
analysis of the marginal costing has been conducted to determine the usability of the same in
decision making. Also, use of the marginal costing tool in the making of short term decisions by
the organizations has been explained along with the features of marginal costing technique and
its importance in the organization which helps in taking decisions and attains sustainable success
and goals for the organization.
B.
Marginal costing is a technique that is used to determine the breakeven point by reducing the
variable cost from sales to generate contribution to the product. The contribution is then reduced
by the fixed cost to determine profit for that particular product. Marginal costing equation is
determined as follows:
Sales- Variable Cost = Contribution
Profit = Contribution- Fixed Cost
Marginal cost is the variable cost which includes material cost, labor cost, and variable
overheads cost. Organization calculates the marginal costing to determine the breakeven point
which states that organization should achieve at least break even sales (Sherman, 2019).
Breakeven point can be defined as the level of sales that is to be achieved to cover its variable
cost. In breakeven sales, the organization does not include fixed cost as this cost has to be
incurred irrespective of whether the sales occur or not. Marginal costing has the following
features:
 Marginal costing helps in ascertaining the impact of variable cost on the volume of sales
unit or output.
3

 Marginal costing distinguishes the cost into variable and fixed costs. Also if the cost is
between variable and fixed then the same is considered as semi-variable costs.
 Marginal costing includes breakeven analysis and CVP Analysis.
 In Marginal costing, the profitability is ascertained by the contribution earned on the
product.
 Marginal Costing helps in decision making and making short term decisions.
Marginal costing can be used as a decision-making technique as the same can be used in making
important decisions in the organizations with reference of costing of the product. Marginal
costing helps in differentiating the variable cost of the company and the fixed cost of the
company. The breakeven analysis which is a part of marginal costing helps in analyzing the
breakeven point of the product i.e. it states that organization should cover at least the variable
cost of the product from the sales of such product. It helps in decision making as if the company
is unable to cover its variable cost then in that case the company is incurring losses and company
should take various decisions to improve the same. Also, CVP analysis is done under marginal
costing and the same help in decision making for the company by identification of the
relationship between cost and sales of the organization. If the relationship between cost and sales
is not linear then decisions are to be made to make the linear relationship between the same. CVP
Analysis helps in making informed decisions by the management of the organization. Thus it can
be said that marginal costing is used as the decision-making technique as it helps in analyzing
and interpreting the cost data of the organization to compute the profitability of different
products and if the profitability of the products is not as per the goals and benchmark then certain
decisions are taken by the management to improve the same to achieve the desired results
(corporatefinanceinstitute, 2019). Marginal costing helps in differentiating costs on the basis of
variable and fixed. The fixed cost is to be incurred irrespective of the sales however variable cost
has a relationship with sales of the product.
Marginal Costing is also used as a tool for making short term decisions. Following are some of
the short term decisions that can be made using marginal costing:
 Limiting Factor Analysis- Marginal costing helps in analyzing limiting factors in
production. It helps in analyzing which factors are not available easily and are affecting
4

the production process. This includes shortage in labor, machine hour shortage,
unavailability of material and other such factors.
 Providing discounts to boost sales in the short term- Marginal costing helps in making
decisions about whether the organization should provide a discount for a particular
product by conducting a breakeven analysis of that product. If the sale price per unit is
able to cover the variable cost then the organization has a scope of providing discounts to
boost the sales.
 Acceptance of new or special orders- Organization has to sometimes make a decision on
the particular product or order about whether such product should be produced or order
should be accepted. Marginal costing helps in giving a solution to such short term
decision making by conducting CVP analysis of the product which states the relationship
between the cost and volume of the product. Also, it analyses whether the product is
manufactured and order if accepted would be able to cover the break even and would not
cause loss to the organization.
 Launching a new product: Organization should also focus on the short term impact for
the launching of the product. The organization should calculate the variable costs and
losses that organization would incur due to the launch of the product and if the product
will incur losses after the launch then the organization will have to make provisions for
the same. Marginal costing helps to analyze the costs of such new product thus helping in
decision making.
Thus it can be seen that the marginal costing technique is an important aspect of costing and can
be used by the organization for decision making especially short term decisions.
Conclusion
Thus to conclude it can be said that marginal costing is an important technique for the
organization and organization should follow marginal costing technique for taking various
decisions for the organization which would help in achieving objectives of the organization.
Also, it can be seen that the marginal costing technique can be used as a tool for making different
types of short term decisions and to achieve short term goals.
5

References
 Bragg, S. 2019, Marginal cost pricing. [online] AccountingTools. Available at:
https://www.accountingtools.com/articles/2017/5/16/marginal-cost-pricing [Accessed 28
Mar. 2019].
 Corporatefinanceinstitute, 2019, Marginal Cost Formula - Definition, Examples,
Calculate Marginal Cost. [online] Corporate Finance Institute. Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/marginal-cost-
formula/ [Accessed 29 Mar. 2019].
 Sherman, F. 2019, Importance of Marginal Costs and Benefits. [online]
Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/importance-
marginal-costs-benefits-46506.html [Accessed 28 Mar. 2019].
6