Professional Documents
Culture Documents
Chapter 07 - Introduction To Marginal Costing
Chapter 07 - Introduction To Marginal Costing
CONDUCTED BY:
P. Ayanthi Madumali
Intended Learning Outcomes
• At the end of the chapter, you will able to
1. Marginal Costing
Sn – Vn = F + Pn
C =F+P
Where ,
S = Selling Price
V = Variable cost of n units
F = Fixed cost
P = Profit of n units
• Total contribution > Fixed cost = …………
Less: Expenses
Fixed selling expenses X
Fixed admin. expenses X
Other fixed expenses X
Net Profit X Net Profit X
• Example 03:
• Budgeted activity was expected to be 20,000 units per
year.
• Sales Rs.100,000
• Manufacturing cost - Fixed cost Rs.15,000
- Variable cost Rs.35,000
Administration & Selling Expenses Rs. 25,000
• Required:
• Prepare absorption and marginal costing statements
Marginal Costing Absorption Costing
Costs are classified as fixed Costs are classified as
& variable direct & indirect
The year end inventory is The year end inventory of
valued at variable cost finished goods valued at
only. total cost.
The fixed overheads are The fixed overheads are
charged directly to the not charged directly to the
costing profit loss account costing profit loss account
and not absorbed in the and absorbed in the
product units. product units.
Break Even Analysis / CVP Analysis
• Breakeven analysis is the study of the relationship
between selling prices, sales volumes, fixed costs,
variable costs and profits at various levels of activity
1. Traditional approach
2. Contribution approach
Traditional Break Even Chart
• This is prepared by drawing the following
curves.
I. Fixed cost
II. Total cost
III. Total Revenue
Traditional Break Even Chart
Contribution Break Even Chart
• In order to prepare the contribution chart following
curves should be drawn
1. Total cost curve
2. Variable cost curve
3. Total revenue curve
Alternative form of contribution break even
chart
• Following alternative curves can be drawn to
illustrate break even pint using contribution
chart.
1. Contribution curve
2. Fixed cost curve
Profit Chart
• Under this method of CVP analysis, only profit
or loss curve is drawn in order to identify the
break even level.
X Y Z Total
Sales 25,000 40,000 35,000 100,000
Variable costs 15,000 20,000 28,000 63,000
Fixed costs 18,500
Limitation of Break Even Chart
• A liner relationship does not always exist.
• We assume that a company manufactures only
one product . In reality, a company may
produce two or more product.
• We focus on short period where the fixed cost is
fixed. However , in the long run fixed cost
varies.
• We assume that technology and other factors
does not change.
Marginal Costing & Management Decision
In Short Run
Tutorial No: 07 ( Q: 2 - 7 )
Management Decision In Short Run
• Concept of Marginal costing is very useful in making
management decision in short run ,
1. When a limiting factors exits
2. Acceptance of special order
3. Dropping a loss Making product
4. Make or buy Decision
When a limiting factors exits
Steps:
1. Ascertain the contribution per each good
2. Ascertain the contribution per limiting factor
3. List the order of preferences.
Acceptance of special order