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marginal analysis. Marginal analysis is the process of breaking down a decision into a series of ‘yes or no’ decisions. More formally, it is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity.

To make a decision using marginal analysis, we need to know the willingness to pay for each level of the activity. As mentioned, this is also known as the marginal benefit from an action.

To decide how many drinks to buy, you have to make a series of yes or no decisions on whether to buy an additional drink. In Table 1.3a the marginal benefit is diminishing. This means that you are willing to pay more for the 1st drink than the next. Your friends are all drinking, so you are likely willing to pay quite a lot for your 1st drink. By the 4th, you may feel as though you do not need another.

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Johnson Tires, a public company, consistently manufactures 10,000 units of truck tires each year, incurring production costs of $5 million. The following year, the market demand for tires increases significantly, requiring the additional production of units, which prompts management to purchase more raw materials and spare parts as well as hire more manpower. This demand results in overall production costs of $7.5 million to produce 15,000 units in that year.  As a financial analyst, you determined the marginal cost of $500 is accounted counted for each additional unit produced.

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Since it’s inevitable that the volume of output will increase or decrease with each level of production. Thus, the quantities involved are significant enough to evaluate the changes made. An increase or decrease in the volume of goods produced translates to costs of goods manufactured (COGM); therefore, it is important to know the difference. To determine the changes in quantity, the number of goods made in the first production run is deducted from the volume of output made in the following production run.

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At each level of production and during each time period, costs of production may increase or decrease, especially when the need arises to produce more or less volume of output. If manufacturing additional units requires hiring one or two workers and increases the purchase cost of raw materials, then a change in the overall production cost will result. To determine the change in costs, simply deduct the production costs incurred at during the first output run from the production costs in the next batch when output has increased.

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Marginal Cost =  (Change in Costs) / (Change in Quantity)

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represents the incremental costs incurred when producing additional units of a good or service. It is calculated by taking the total change in the costs of producing more goods and dividing that by the change in the quantity of good produced. The usual variable costs included in the calculation are labor and materials, plus the estimated increases in fixed costs (if any), such as administration, overhead, and selling expenses. The marginal cost formula can be used in financial modeling to optimize the generation of cash flow.

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The Total Cost is the actual cost incurred in the production of a given level of output. In other words, the total expenses (cost) incurred, both explicit and implicit, on the resources to obtain a certain level of output is called the total cost.

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A type of expense that is more or less constant over a low level shift in activity, but which changes incrementally when activity shifts substantially. An example of a step fixed cost that might be incurred by a manufacturing business would be the need to buy new production machinery to step production activity up another level

Read more: http://www.businessdictionary.com/definition/step-fixed-cost.html

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Semivariable costs are costs or expenses whose behavior is partially fixed and partially variable. Semivariable costs are also referred to as mixed costs.

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Variable cost changes with the level of output.
As production  increases variable cost  increases
As production decreases variable cost   fall
Example : raw materials

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A fixed cost is an expense that does not change as production volume increases or decreases within a relevant range. In other words fixed costs are locked in place as long as operations stay within a certain size. Fixed costs are less controllable than variable costs because they are not based on volume or operations.

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Cost accounting is a facet of management accounting that determines the actual cost associated with manufacturing a product or providing a service by looking at all expenses within the supply chain. It is done for the purpose of budget preparation and profitability analysis. The information derived from this process is useful to managers in determining which products, departments or services are most profitable and which ones need improvement.