Unit 8 Management
What would be the cost of producing 17,ooo units
• Production units
Lesson 4 Aims and objectives
• Describe how marginal cost is calculated
• Prepare a marginal costing statement
• Calculate the contribution
• Explain what marginal costing is useful for
Under this method only the variable costs of production are included in the cost per unit. The fixed overheads are treated as period costs and not part of the cost unit.
Marginal costing values output and stock by the variable costs required by each unit:
variable production overheads.
no fixed overheads or non-production overheads are absorbed into product costs = period costs
Marginal costing STATEMENT
Sales (12,500 x £100)
Cost of sales (Variable costs)
(at marginal cost, 12,500 × £40)
Less: Fixed production costs
Fixed non-production costs
Profit for the period
• Milliband Suites Limited manufactures a special type of chair. It is planning to sell 5,000 chairs for
• The costs are estimated as follows
• Direct materials £25 per chair
• Direct labour £40 per chair
£5 per chair
• Variable production overheads
• Fixed overheads£10 per chair
• Calculate the marginal cost and contribution
What is the contribution for one unit?
• Contribution per unit = selling price per unit less variable cost per unit
• How can this be used?
Profit AND contribution
Profit measures the difference between the sales price of a unit and the variable and fixed costs of making and selling that unit.
Profit AND contribution
Contribution measures the difference between the sales price of a unit and the variable costs of making and selling that unit. Contribution is used in decision making as it is assumed that fixed costs will not change as activity changes.
There is therefore no direct link between profit and output - if output doubles, profits do not necessarily double. However there is a direct link between contribution and output – if output doubles or triples then contribution will double or triple.
Using Marginal costing
• Price setting
• Forecasting/cash flows
• Break even
• CHAPTER 10 QUIZ
True or False
1. Capital expenditure relates to expenditure on assets that will benefit the organisation for more than one accounting period.
2. All direct costs behave as variable costs.
3. Semi-variable costs contain both a fixed element and a variable element.
4. Fixed costs may change from time to time due to factors other than output levels.
5. Variable costs per unit of output do not alter when volumes change.
• How is the marginal cost calculated
• What is the contribution
• What is it useful for?
Lesson 5 BREAK EVEN
“SPECIAL ORDER” PRICING
• Making a decision about a one-off order that may be below normal selling price,