Making Sense of Marginal Costing

Making Sense of Marginal Costing

Learning Objective

At the end of the lesson, you will be able to understand the concept of marginal costing and its application in decision-making.

Introduce the learning objective and set expectations for the lesson.

What do you already know about marginal costing?

Slide 1: Introduction to Marginal Costing

Definition: Marginal costing is a cost accounting technique that focuses on the changes in costs and volume of output. It distinguishes between fixed and variable costs.

Provide a brief definition of marginal costing.

Slide 2: Key Concepts

Variable Costs: Costs that change with the level of production or sales. Examples include direct materials, direct labor, and variable overheads.

Explain the concept of variable costs and provide examples.

Slide 3: Key Concepts

Fixed Costs: Costs that remain constant regardless of the level of production or sales. Examples include rent, salaries, and insurance.

Explain the concept of fixed costs and provide examples.

Slide 4: Contribution Margin

Contribution Margin: The difference between sales revenue and variable costs. It represents the amount available to cover fixed costs and generate profit.

Define contribution margin and its significance in marginal costing.

Slide 5: Calculation of Contribution Margin

Contribution Margin = Sales Revenue - Variable Costs

Show the formula for calculating contribution margin.

Slide 6: Break-Even Analysis

Break-Even Point: The level of sales at which total revenue equals total costs, resulting in neither profit nor loss.

Introduce the concept of break-even analysis and its relevance in decision-making.

Slide 7: Break-Even Analysis

Break-Even Point (in units) = Fixed Costs / Contribution Margin per unit

Explain the formula for calculating the break-even point in units.

Slide 8: Break-Even Analysis

Break-Even Point (in sales value) = Fixed Costs / Contribution Margin Ratio

Explain the formula for calculating the break-even point in sales value.

Slide 9: Advantages of Marginal Costing

1. Helps in decision-making by analyzing the impact of changes in production volume.
2. Provides a clear distinction between fixed and variable costs for better cost control.

Highlight the advantages of marginal costing.

Slide 10: Limitations of Marginal Costing

1. Assumes a linear relationship between costs and volume, which may not be accurate.
2. Ignores the effect of changes in fixed costs on profitability.

Discuss the limitations of marginal costing.

Slide 11: Marginal Costing vs. Absorption Costing

Marginal Costing: Considers only variable costs in product costs.
Absorption Costing: Includes both variable and fixed costs in product costs.

Compare and contrast marginal costing with absorption costing.

Slide 12: Marginal Costing vs. Absorption Costing

Marginal Costing: Suitable for short-term decision-making and cost control.
Absorption Costing: Required for external reporting and tax purposes.

Further discuss the differences between marginal costing and absorption costing.

Slide 13: Practical Application

Example: A company is considering whether to accept a special order that requires additional production. Marginal costing helps analyze the impact on profitability.

Provide a practical example to illustrate the application of marginal costing in decision-making.

Slide 14: Practical Application

Example: A company wants to determine the minimum price at which a product should be sold to cover all costs and achieve a target profit.

Present another practical example to reinforce understanding of marginal costing.

Slide 15: Interactive Exercise

Calculate the contribution margin and break-even point for a given scenario.

Engage students with a calculation exercise to apply their knowledge.

Slide 16: Interactive Exercise

Analyze the impact of changing production volume on profitability using marginal costing.

Encourage students to analyze different scenarios and discuss the results.

Slide 17: Recap

Review the key concepts of marginal costing: variable costs, fixed costs, contribution margin, break-even analysis, advantages, and limitations.

Summarize the main points covered in the lesson.

Slide 18: Real-World Examples

Explore real-world examples of companies using marginal costing to make informed decisions and improve profitability.

Present case studies or examples to demonstrate the practical application of marginal costing.

Slide 19: Q&A Session

Provide an opportunity for students to ask questions and clarify any doubts they may have.

Allocate time for a Q&A session to address student queries.

Slide 20: Conclusion

Recap the key takeaways from the lesson and emphasize the importance of understanding marginal costing for effective decision-making.

Conclude the lesson by summarizing the main points and highlighting their relevance.

Write down 3 things you learned in this lesson.

Have students enter three things they learned in this lesson. With this they can indicate their own learning efficiency of this lesson.

Write down 2 things you want to know more about.

Here, students enter two things they would like to know more about. This not only increases involvement, but also gives them more ownership.

Ask 1 question about something you haven't quite understood yet.

The students indicate here (in question form) with which part of the material they still have difficulty. For the teacher, this not only provides insight into the extent to which the students understand/master the material, but also a good starting point for the next lesson.