Now Is The Time To Confirm Marginal Costs In Managerial Accounting


Now Is The Time To Confirm Marginal Costs In Managerial Accounting

A survey done by Central Bank of Kenya sought to establish the drivers of firm expansion and growth, domestic and external factors that could constrain their growth and/or expansion over the next one year and their mitigating factors. The survey was published in March 2023. The result of the survey showed that customer centricity, talent management and expansion into new markets were the key drivers of firms’ growth over the next one year.

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In terms of domestic factors that could constrain their growth, respondents of the survey highlighted the economic environment (high inflation), the business environment (cost of doing business) and performance of the exchange rate as major constraining factors.

For companies in the Services sector, economic environment was of a greater concern while companies in the manufacturing and agriculture sectors were more concerned with exchange rate and business environment/cost of doing business, respectively. Other highly reduced consumer demand, increased taxation and weather conditions.

What are Managerial costs in relation to Managerial Accounting? Why is it important to a successfully run business?

A sectoral analysis of the identified internal factors from the survey revealed that internal measures to control costs and increased marketing/better branding were important factors for agriculture sector firms while strong supply chains and internal measures to contain costs were important factors for manufacturing firms.

Marginal cost refers to the additional cost incurred when producing one more unit of a product or service. Marginal cost is about knowing how much extra it costs you to make just one more of something. It’s like calculating the cost of that “extra” thing you’re making.

How It Works

  1. Initial Costs: These are your startup costs and expenses
  2. Making Product/Service: This is the cost of goods sold
  3. Marginal Cost: Let’s say a customer comes along and asks for one more product/service. To make that extra product/service, you’ll need to utilize a few more resources. The cost of these extra resources is the marginal cost for that extra product/service.

In simpler terms, the marginal cost is the cost of the stuff you need to add to make just one more product after you’ve already made your first batch. It’s like asking, “How much more money will I spend if I make one more of product x?”

When examining and confirming marginal costs in managerial accounting, here are some key points to keep in mind:
  1. Decision-Making Tool: Marginal cost analysis provides a valuable tool for managers to evaluate different alternatives and choose the most profitable option. Whether it’s deciding on production levels, pricing strategies, or special orders, understanding marginal costs can lead to more optimal decisions.
  2. Cost Control: By understanding how costs change with each additional unit produced, managers can identify areas where cost control measures are needed. This knowledge helps in reducing wastage and inefficiencies.
  3. Profit Maximization: Marginal cost analysis contributes to profit maximization by guiding decisions that ensure costs are minimized while revenues are maximized. This balance is essential for achieving higher profitability.
  4. Resource Allocation: Managers can allocate resources more effectively by comparing the marginal costs and benefits associated with different products or projects. This leads to better resource allocation and improved overall performance.
  5. Dynamic Environment: In today’s rapidly changing business environment, decisions need to be adaptable. Marginal cost analysis takes into account the dynamic nature of costs and helps managers adjust strategies accordingly.
  6. Short-Term and Long-Term Decisions: Marginal cost analysis is relevant not only for short-term decisions but also for long-term strategic planning. It assists in aligning short-term actions with long-term goals.
  7. Risk Assessment: Understanding how changes in production levels or pricing affect marginal costs can also help in assessing potential risks associated with these decisions.
  8. Continuous Improvement: Regularly confirming and reviewing marginal costs enables businesses to identify opportunities for continuous improvement. It encourages ongoing assessment of production processes and cost structures.

Overall, your emphasis on confirming the importance of marginal costs in managerial accounting highlights the significance of using this analysis as a foundation for effective decision-making and strategic planning within businesses.

At CFODHUB we support corporates and SMEs by offering them best-in-class strategic financial advice and support at an affordable rate.

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