Cost Accounting

The coefficient of determination is a statistical measurement that investigates how variations in one variable may be explained by changes in another one.

For example, when a person gets pregnant has a direct relation to when they give birth.

In statistics, the coefficient of determination denoted by R² or r² and pronounced “R squared”.

Standard costing is a costing approach that compares standard expenses and revenues to real outcomes in order to identify variations and their causes, alert management of the deviations, and take corrective action to improve the situation.

J. R. Brown and L. R. Howard defines standard costing “as a technique of cost accounting which compares the ‘standard cost’ of each product or service with the actual cost, to determine the efficiency of the operation, so that any remedial action may be taken”.

I.C.M.A., London, has defined the term ‘Standard Costing’ as “the preparation of standard costs of products and services”.

Thus, standard costing involves:

The setting of standards

Ascertainment of actual results

Comparing standards with actual costs to determine the variance

Investigating the discrepancies and taking the necessary steps

Some of the important decision-making areas where marginal costing technique is used are:

Fixation of Selling Price: It helps in deciding selling price in various market scenarios ( During the recession, international market )

Decision relating to make or buy: Helps in making decisions regarding manufacturing a good or buying it.

Retaining or replacing machinery.

 Helps in deciding whether to sell the product in the home or in the export market.

Expanding or contracting the production.

Shutdown or continue operations.

Advantages of Marginal costing: Marginal Costing is a crucial approach for making managerial choices. It’s also a useful tool for cost control and profit forecasting.

The Technique is less complicated:  Because fixed overheads are not included in the cost of production, there is no need for a time-consuming and expensive way of calculating the overhead recovery rate, modifying it, and assigning overheads. As a result, there are no difficulties or ambiguity with this approach.

A Vehicle for Cost Control:

Marginal costing is a cost-control, cost-analysis, and cost-presentation method used by managers. It provides the data in a way that assists various levels of management in cost control. It is also a significant cost-cutting tool.

Because this method only considers variable expenses that are always changeable, it becomes simpler to assign responsibility and exert control over them. Fixed expenses, on the other hand, may be successfully controlled because they are included in the profit calculation as a whole.

 Meaningful Managerial Reporting: The Marginal Costing method is a strong foundation for managerial reporting. The information provided by reports created using this approach is based on sales rather than production. As a result, it reflects the true condition of efficiency. The marginal costing approach accurately and clearly displays the impact of fixed costs on profit.

 Profit Planning: It helps in analysing Break-even point and thus helps in deciding profit.

Easy Understanding of Income Statement: By assigning fixed and variable costs individually, management may readily comprehend the revenue statement. Furthermore, stock valuation is simplified since it is valued at a fixed marginal cost.

Appraisal of Profitability: The technique of Marginal Costing is used to evaluate profitability. The revenue-earning potential of the various departments varies. Marginal cost analysis may be used to measure or evaluate the performance of each department or segment.

Decision Making:The major benefit of marginal costing is that it assists management in making different critical managerial decisions, especially when dealing with situations that demand quick judgments.

Price Policy and Price Determination: This technique contributes significantly to the area of price policy and price determination.

The Institute of Cost and Management Accountants’ publication A Report on Marginal Costing’ defines Marginal Costing: “The ascertainment, by differentiating between the fixed costs and variable cost, of marginal costs and of the effect on profit of changes in volume or type of output.”

The phrase marginal cost refers to the extra cost of generating an additional unit of output, which may be calculated using the total variable cost given to one unit.

The marginal cost, or variable cost, is charged to units of cost, whereas the fixed cost for the time is entirely written off against the contribution.