COST CONCEPTS Cost Concepts (Assignment 4B)



Cost Concepts (Assignment 4B)

Product costing techniques have gained widespread use in the health care industry. Some various types of costing techniques include activity based costing, price-led costing, marginal costing, life-cycle costing and target costing (Finkler 1994). This paper outlines the cost drivers applicable to healthcare industry and how costing techniques can be applied to reduce costs within a health care organization.

 

Marginal Costing

It is the ascertainment of marginal cost by differentiating between fixed and variable cost. It is used to ascertain the effect of changes in volume or type of output on profit. Marginal cost is the cost incurred for a series, or additional control lot. Using marginal costing, one can determine marginal revenue by the production and sale of additional revenue provided by the last unit, and the marginal profit (McNair, 2007). The following table illustrates the variables of marginal costing:

Number of Series 100 units

Total

Cost

Total

Revenue

Marginal Revenue

Marginal

Profit

20

85000

96000

-

-

21

87500

99000

2500

3000

22

89900

102000

2400

3000

The marginal cost is not a cost but an estimated cost. It calculates whether the production of an additional unit is profitable for the company. Two situations may arise: the production of an additional set does not change the cost structure, that is, the marginal cost of a unit remains same as the unit variable cost, and; additional production requires an additional cost, that is, marginal cost of a unit is the sum of unit variable cost and fixed costs. Indeed, in the health industry, we can launch an additional set rather than additional unit (Antos & Rainey 1990). We will see that the difference between theory and reality is problematic for mathematical demonstration of the definition of marginal cost. Therefore, a general point of view can be defined as the marginal cost:

Marginal cost = (cost n +1) - (cost n)

By definition, there are always the variable costs (as there is increased production). Variable costs are proportional to the activity, and they can be direct or indirect.

The marginal cost may also include fixed costs. Indeed, it may happen that we should modify the structure to produce a unit or series. Fixed costs can vary over a period, but they are not proportional to the activity. One can imagine for example that we should expand a factory to increase production.  In a table below, we find the synthesis of production costs prepared by the controller.

Quantities manufactured

Total Production Cost

10 000

1780000

20 000

3200000

30 000

4320000

40 000

5170000

50 000

5942500

60 000

6993000

70 000

8319500

80 000

10,616,000

90 000

13,189,500

100 000

16,400,000

The following table uses the data related to cost and units to calculate the total marginal cost and marginal cost per unit for each level of production.

Quantities manufactured

Total Production Cost

Average unit

Total marginal cost

Marginal cost per unit

n

C

C / n

C (n +1) - C (n)

(CMU) (1)

10 000

1780000

178.00

1780000

178,00 (2)

20 000

3200000

160.00

1420000

142,00 (3)

30 000

4320000

144.00

1120000

112.00

40 000

5170000

129.25

850 000

85.00

50 000

5942500

118.85

772 500

77.25

60 000

6993000

116.55

1050500

105.05

70 000

8319500

118.85

1326500

132.65

80 000

10,616,000

132.70

2296500

229.65

90 000

13,189,500

146.55

2573500

257.35

100 000

16,400,000

164.00

3210500

321.05

Marginal cost per unit = Total / No Change

= 1 780 000 / (10 000 - 0)

= (1 420 000 - 1 780 000) / (20 000 - 10 000)

We see that the marginal cost per unit decreases in first time and then increases at a later ...