advantages and disadvantages of cost approach
14. Any price above this floor price may be quoted to increase the total contribution. (8) It avoids the illogical carry forward of current year’s fixed cost to next period in the form of stock. The technique of marginal costing is difficult to apply in industries like shipbuilding, contracts, etc., where the value of work- in-progress is large in proportion to turnover. To conclude, I have written down a set of review questions: 1. (b) No profit no loss points – With the help of technique of break-even charts involved under marginal costing system, the point of no-profit-no-loss can be revealed and information can be presented to management so as to facilitate comparisons. 11. Correct and sound decisions are taken on the basis of information revealed by this technique. Under the technique of marginal costing, contribution in terms of key factor is also calculated so as to know the comparative profitability under different alternatives. It cannot be easily applied in job costing. Instead, sales comparisons usually drive market valuations of these types of properties. 4. In large contracts in particular, fixed costs cannot be excluded while valuing work-in- progress in order to show the correct position of the contract. This may prove dangerous in the long run. Show by example how you would adjust real estate sales for appraisal purposes. In the long run, the system may not be suitable and full costs might have to be taken care of. And, thus the results can easily be grasped.

Demonstrate how you would appraise property by annual gross income multipliers; monthly gross income multipliers. Profit planning .

A few of the managerial problems that are simplified by the use of marginal costing are – make or buy decisions, pricing of products, selection of a suitable sales mix, choosing from among alternative methods of production, etc. Alternate use of production facilities or methods of manufacture etc., may be possible. Less complicated technique . (b) Hand or machine labour – The problem of employing machine or to produce entirely by hand labour can be solved with the help of marginal costing technique. The income approach is the main method used here, although a cost approach may be implemented when design, construction, functional utility or grade of materials require individual adjustments.

The biggest advantage of this is that company knows exactly the amount of expenditure that has incurred on making a product and therefore they can add profit margin accordingly which helps in achieving the desired revenue for a firm. The per unit marginal cost works out to Rs. The information is very much useful for management. It provides him with an insight into the exact nature of every single item of cost. A bulk special order to supply the product at Rs. In the case of cost-plus contracts, the contractor would like to recover from the contract the full cost of the contract plus profit. The appraisal approach is a procedure for determining an asset's value using an appraisal, rather than market transaction pricing. 8 leaves a profit margin of Re. Relative Profitability – In case a number of products are being manufactured, marginal costing facilitates the study of relative profitability of different products. Thus, wrong decisions may be taken on the basis of marginal costing, particularly in times of early recession when marginal costing projects the bleak picture in a magnified way.

It requires certain assumptions, including taking for granted that there is enough available land for the buyer to build an identical property.

TOS4. 3. 6. 5.

Ascertainment of real profit . This prevents the carry forward in stock valuation of a proportion of current year’s fixed overheads. This happens particularly in case of seasonal factories. Share Your PDF File 7. The cost approach tends to lose accuracy for building showing substantial depreciation. 8. Unrealistic under fluctuating production – When production fluctuates highly, marginal cost data become unrealistic. In view of the advantages of the cost approach, what types of property would you appraise under this method of valuation? This is not disclosed by marginal costing.

What is the significant difference between reproduction and replacement costs? (d) Highlights contribution – Excess of sales revenue over variable cost of sales is the contribution generated for meeting fixed costs. The cost approach is often used for new construction, too.

Third, the cost technique is appropriately used to estimate the cost of building … Advantages and Disadvantages of the Cost Approach, Discounted After-Tax Cash Flow Definition. Other terms in use are Direct costing which is used in U.S.A., contributory costing, variable cost and comparative costing. It will also reduce the speed to which an organization is able to adapt to changing circumstances. (8) Income tax authority does not accept the valuation of stock at marginal cost. This is not disclosed by marginal costing.

Less complicated technique – This technique is less complicated and free from any confusion. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. Fails in long term – For long term price policy, this technique fails in providing solution. Yet there is the problem in the case of variable overheads. It is, therefore, said that “standard marginal costing system in conjunction with budgetary control can serve as the best means of cost control.”. It is helpful in determining which is profitable whether to buy or manufacture a product. If marginal costs are not presented properly and the interpretation is not correctly made with regard to all the variable factors in a particular situation, marginal costing may lead to a wrong path. To illustrate, suppose, for an existing business, per unit total cost of a product is Rs.

Explain thoroughly. (j) Budgetary planning – Besides highlighting contribution not merely of every product but in total also, marginal costing also shows contribution per unit of a key factor. What Does the Operating Expense Ratio Measure? However, on the basis of marginal costing, the offer must be accepted, since the fixed overheads have already been absorbed by the existing production, no additional fixed overheads arc going to be incurred and the marginal cost of Rs. Advantages and Disadvantages of Marginal Costing: 10 Points, Advantages and Disadvantages of Marginal Costing – Explained, Advantages and Disadvantages of Marginal Costing: 9 Quick Points, Public Sector Enterprises or Undertakings in India, Learn about the Advantages and Disadvantages of Marginal Costing. The management can resort to horizontal and vertical comparison of such costs, in particular, for effecting cost control. 6. The lack of similar building materials also reduces the accuracy of the appraisal and increases room for subjectivity.

3. When a cost approach appraisal comes in below market pricing, it can be a sign of an overheated market.

In this case, marginal costing system may give misleading results. (4) In highly seasonal businesses, for example, winter garment manufacturing stock is build up during the ‘off-season’, in order to cope with the peak seasonal demand. 6. If the building is designed with typical building features, workmanship, and materials, there is usually a close approximation to new construction cost and market value. Basis of managerial reporting – It serves as a good basis for managerial reporting.


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