(a) DISCUSS advantages of Marginal Costing. (b) LIST DOWN certain financial expenses and income included in Financial Accounts only. (c) DISCUSS the…

(a) Advantages of Marginal Costing: 1. Simplified Pricing Policy: The marginal cost remains constant per unit of output whereas the fixed cost remains constant in total. Since marginal cost per unit is constant from period to period within a short span of time, firm decisions on pricing policy can be taken. 2. Proper recovery of Overheads: Overheads are recovered in costing on the basis of pre-determined rates. If fixed overheads are included on the basis of pre-determined rates, there will be under- recovery of overheads if production is less or if overheads are more. There will be over- recovery of overheads if production is more than the budget or actual expenses are less than the estimate. This creates the problem of treatment of such under or over-recovery of overheads. Marginal costing avoids such under or over recovery of overheads. 3. Shows Realistic Profit: Advocates of marginal costing argues that under the marginal costing technique, the stock of finished goods and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period. 4. How much to produce: Marginal costing helps in the preparation of break-even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company. 5. More control over expenditure: Segregation of expenses as fixed and variable helps the management to exercise control over expenditure. The management can compare the actual variable expenses with the budgeted variable expenses and take corrective action through analysis of variances. 6. Helps in Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc. 7. Short term profit planning: It helps in short term profit planning by B.E.P charts. (b) Items included in Financial Accounts only- (A) Purely Financial Expenses: (i) Interest on loans or bank mortgages (ii) Expenses and discounts on issue of shares, debentures etc. (iii) Other capital losses i.e., loss by fire not covered by insurance etc. (iv) Losses on the sales of fixed assets and investments (v) Income tax, donations, subscriptions (vi) Expenses of the company's share transfer office, if any. (B) Purely Financial Income (i) Interest received on bank deposits, loans and investments (ii) Dividends received (iii) Profits on the sale of fixed assets and investments (iv) Transfer fee received (v) Rent receivables. (c) By-product cost, when they are of small total value, can be dealt in cost accounting in the following ways: When the by-products are of small total value, the amount realised from their sale may be dealt in any one of the following two ways: 1. The sales value of the by-products may be credited to the Costing Profit and Loss Account and no credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account here is treated either as miscellaneous income or as additional sales revenue. 2. The sale proceeds of the by-product may be treated as deductions from the total costs . The sale proceeds in fact should be deducted either from the production cost or from the cost of sales. (d) There are two types of material losses viz. (i) Normal loss and (ii) Abnormal loss. (i) Normal Process Loss: It is also known as normal wastage. It is defined as the loss of material which is inherent in the nature of work . Such a loss can be reasonably anticipated from the nature of the material, nature of operation, the experience and technical data. It is unavoidable because of nature of the material or the process. It also includes units withdrawn from the process for test or sampling. Treatment in Cost Accounts: The cost of normal process loss in practice is absorbed by good units produced under the process. The amount realised by the sale of normal process loss units should be credited to the process account. (ii) Abnormal Process Loss: It is also known as abnormal wastage. It is defined as the loss in excess of the pre-determined loss (Normal process loss). This type of loss may occur due to the carelessness of workers, a bad plant design or operation, sabotage etc. Such a loss cannot obviously be estimated in advance. But it can be kept under control by taking suitable measures. Treatment in Cost Accounts: The cost of an abnormal process loss unit is equal to the cost of a good unit. The total cost of abnormal process loss is credited to the process account from which it arises. Cost of abnormal process loss is not treated as a part of the cost of the product. In fact, the total cost of abnormal process loss is debited to costing profit and loss account .