Operation Report

6.5 For Management Decision Making

6.5.1 Costs are classified for the purpose of management decision making under different circumstances as under :

Cost

Management Decision Making

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Marginal Differential Opportunity

Cost Cost Cost

Replacement

Cost

Relevant Sunk

Cost Imputed Cost

cost

Normal

Cost

Abnormal

Cost

Avoidable

Cost

Un-avoidable Cost

6.5.2 Marginal cost is the aggregate of variable costs, i.e. prime cost plus variable overhead. Marginal cost per unit is the change in the amount at any given volume of output by which the aggregate cost changes if the volume of output is increased or decreased by one unit.

6.5.3 Marginal cost is used in Marginal Costing system. For determining marginal cost, semi-variable costs, if any, are segregated into fixed and variable cost. Then, variable costs plus the variable part of semi-variable costs is the total marginal cost for the volume of production in consideration.

Example :

A. Production 45,000 units

Fixed Cost Variable Cost

B. Cost Rs lakhs Rs lakhs

1. Material cost 4.50

2. Labour cost 2.45

3. Fixed Cost 4.80...