 For the recovery of Overheads there are 2

methods generally used in Practice :

 MARGINAL COSTING
 ABSORBTION COSTING
marginal costing is the ascertainment of marginal cost and the
effect on profit of changes in volume or type of output by
differentiating between Fixed cost and variable cost .
method of capturing all costs associated with manufacturing
a particular product . Absorption costing, also called full
costing, includes anything that is a direct cost in producing a
good in its cost base.
marginal cost is the change in the total cost that arises when
the quantity produced is incremented by one unit; that is, it is
the cost of producing one more unit of a good.
 •A cost sheet is a statement prepared at periodical intervals of time, which
accumulates all the elements of the costs associated with a product or
production job. It is used to compile the margin earned on a product or job
and forms the basis for the setting of prices on similar products in the
future.
A Cost Sheet depicts the following facts:
• Total cost and cost per unit for a product.
• The various elements of cost such as prime cost, factory cost, production cost,
cost of goods sold, total cost, etc.
• Percentage of every expenditure to the total cost.
• Compare the cost of any two periods and ascertain the inefficiencies if any.
• Information to management for cost control
• Calculate and summarize the total cost of the product.
Prime Cost: It comprises of direct material, direct wages, and direct expenses.
Alternatively, the Prime cost is the cost of material consumed, productive wages, and
direct expenses.
Factory Cost: Factory cost or works cost or manufacturing cost or production cost
includes in addition to the prime cost the cost in indirect material, indirect labor, and
indirect expenses. It also includes amount or units of WIP or incomplete units at the
end of the period.
Cost of Production: When Office and administration cost at the end of the period are
added to the Factory cost, we arrive at the cost of production or cost of goods sold.
Here, we make an adjustment for opening and Closing finished goods.
Total Cost: Total cost or alternatively cost of sales is the cost of production plus
selling and distribution overheads.
 Prime Cost = Direct Material Consumed + Direct Labour + Direct
Expenses
Step I
Direct Material= Material Purchased + Opening stock of raw
material-Closing stock of raw material.

Works Cost = Prime Cost + Factory Overheads (Indirect Material

Step II + Indirect Labour + Indirect Expenses)+opening Work in
progress-Closing Work in progress

Cost of Production = Works Cost + Office and Administration

Step III
overheads + Opening finished goods-Closing finished goods

Total Cost = Cost of Production + Selling and Distribution

Step IV
Overheads

Profit Sales – Total Cost

From the following particulars of a manufacturing concern,
ascertain the Prime Cost:
From the following information ascertain the Works Cost for the
month of August 1997:
Company desires a margin of 20% profit on the cost of sales
Particulars Amount
Direct material-purchased 80000
Direct material -Opening stock 20000
Direct material -Closing Stock 25000
Productive wages 22,000
Direct Expenses 5,000
Consumable stores 4000
Factory manager salary 15000
Unproductive wages 7000
Factory Overheads 12,000
Work-in-progress:
Opening stock 13,000
Closing stock 7,000
Office and administration overheads 28,000
Opening stock of finished goods 5000
Closing stock of finished goods 10000
Selling and distribution overheads 33,000
The following information has been obtained from Modern works Ltd for 3
months ending 31st mar 2019, during which 100 units are produced . Prepare Cost
Sheet . Company desires a margin of 20% profit on the cost of sales. Find
Sales value
Stock of raw material as on 1st January 2019 18000
Stock of raw material as on 31st March 2019 21000
Materials purchased 162000
Carriage paid 3000
Depreciation on plant 6000
Repairs to plant 2000
Factory rent ,taxes and insurance 7000
Indirect labour 9000
Indirect material 11000
Direct labour 28000
Depreciation on furniture 3000
Printing and stationary 1500
Office salary and allowances 14500
Warehouse rent 2400
Advertising 2000
Salesmen salaries and commission 2600
 Contribution is the difference between sales and
variable cost or marginal cost of sales.
 It may also be defined as the excess of selling
price over variable cost per unit.
 Contribution is also known as Contribution
Margin or Gross Margin.
 Contribution being the excess of sales over
variable cost is the amount that is contributed
towards fixed expenses and profit.
 It includes Fixed Cost  It doest not includes
and Profit Fixed Cost
 Profit is the accounting
 Marginal costing Uses concept to determine
this contribution profit /loss of a business
concern
 At BEP, contribution =  Only the sales in excess
FC of BEP results in Profit
 Used in Managerial  Profit is computed to
decision making determine the
profitability of product
and the concern .
1. Fixation of Selling Price:
It becomes necessary for various purposes, like, under normal
circumstances of the interest; at trade depression, accepting
additional order etc.
2. Diversification of Products:
In order to capture a new market or to utilise idle facilities etc., it
may so happen that a new product may be introduced in the
market together with the existing one. the new product may be
introduced only when the same is capable of contributing
something against fixed cost and profit. Fixed cost will not be
considered here on the assumption that the same will not
increase, i.e., the new product will be produced out of existing
resources.
3. Selection of Most Profitable Product-Mix:
If any firm produces more than one product it may have to decide
in what ratio should the products be produced or sold in order to
earn maximum profit. However, the marginal costing techniques
help us to a great extent while determining the most profitable
product or sales mix.

4. Make-or-Buy Decisions:
Sometimes a firm may have to face a problem as to whether a part
should be produced or the same should be purchased from the
outside open market.
In this case, the following two points should carefully be considered:
(a) The Marginal Cost of the product; and
(b) Whether surplus capacity is available.
5. Alternative Method of Production:

It is interesting to note that the techniques of marginal

costing are frequently applied while comparing the
alternative methods of production, viz., whether one
machine is to be employed instead of another, machine-
work or hand-work etc.
It should be remembered that the basis of selection would,
however, be the relative contribution available from various
methods when fixed costs are constant.
6. Effect of Change in Selling Price:
Effect of change in selling prices is another significant factor
which creates problem, particularly when a firm needs
expansion. For its wider market the selling price of the product
may be reduced. Needless to mention that the effect of such a
change in selling price should carefully be considered.

7. Shut-Down or Continue Decisions:

Due to trade recession, unprofitable operation etc. it often
becomes necessary for the management to suspend or close-
down temporarily or permanently a part of activity which should
be taken after careful relevant consideration.
 8. Cost control:
in marginal costing there is fixed cost as well as variable cost .
Fixed cost is controlled by top management and variable cost
is controlled by lower management. Sometimes there are the
cases when profit decreases even when sale increases in such
situations marginal cost helps the concern in finding out the
reasons.
 9. Evaluation of performance:
It helps in evaluating the performance of each sector of
concern.
 10. Profit planning:
Profit increased and decreased due to change in selling price,
variable cost etc. Marginal cost helps in profit planning.