From the following classifications of cost, the inter twined relationship in between the variable cost and marginal cost is explained as below
It is a cost remains constant or fixed irrespective level of production.
Example: Rent Rs 5,00 is to be paid irrespective level of production. It remains constant / fixed irrespective of changes taken place on the level of production.
It is a cost which varies with level of production.
The following are the various components of variable cost.
The variable overheads is the cost involved in the procurement of Indirect materials
Indirect labour and Indirect Expenses.
Indirect Material- cost of fuel, oil and soon
Indirect Labour- Wages paid to workers for maintenance of the firm.
From the above table -1 the marginal cost is equivalent to the variable cost per unit of the various levels of production. The fixed cost of Rs.500 is the cost remains the same at not only irrespective levels of production but also already absorbed at the initial level of production. The initial absorption of fixed overhead led the marginal cost to become as variable cost.
Another major classification is semi variable/fixed cost which is a cost partly fixed / variable to the certain level of production or consumption e-g Electricity charges, telephone charges and so on.
It jointly discards the importance of the fixed cost and the semi- variable cost for analysis while ascertaining the marginal cost.
Marginal Costing is defined as "the ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating between fixed and variable costs."
In marginal costing, the change in the level of cost of operation is equivalent to variable cost due to fixed cost component which is fixed irrespective level of outputs.
Importance of Marginal costing:
Marginal costing profitability statement as follows:
Sales Rs.100,000/-, variable cost Rs.25,000/- and fixed cost Rs.20,000/- find-out the contribution and profit.
Method of Difference
Under this method, the contribution can be computed through finding the differences in between Sales and Variable Cost
i.e. Contribution= Sales – Variable Cost= Rs.1,00,000 – 50,000= Rs.50,000
Method of Coverages
In this method, the contribution is equated with the summation of Fixed cost and Profit.
i.e. Contribution=Fixed Cost+ Profit =Rs.20000+30000=Rs.50,000
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