COST AND MANAGEMENT

ACCOUNTING
LECTURE BY:
MR. DAMBARUDHAR KHODA (D.K)
ASSISTANT PROFESSOR
B.J.B. AUTONOMOUS COLLEGE
MARGINAL COST:

Marginal Cost is the additional cost incurred for

increase in one additional unit of output.
Marginal cost is nothing but the variable cost.
MARGINAL COSTING:
Marginal Costing is the method of ascertaining
marginal cost and it evaluates the effect of fixed
and variables costs on profit due to change in
volume of production.

Marginal Costing is also known as:

a) Contributory Costing
b) Variable Costing
c) Comparative Costing
FEATURES OF MARGINAL COSTING:

1.Only variable costs are charged to the cost unit. Fixed

costs are recovered from contribution.
2.All costs including semi variable costs are divided into two
parts, fixed and variable.
3.Closing inventories are valued at variable cost only.
4.Break-even Analysis and Cost-volume-profit Analysis are
integral parts of this costing technique.
ADVANTAGES OF MARGINAL COSTING:

1. It provides useful data for managerial decision- making.

2. It is a very effective tool of profit planning.
3. It facilitates control over variable costs.
4. Problems on computation of accurate fixed factory overhead rate
can be avoided as fixed overheads are charged against
contribution.
5. It provides the management with many useful techniques for
decision – making like Break – even Analysis, etc.
LIMITATIONS OF MARGINAL COSTING:
1. It assumes the semi- variables costs can be segregated into
two parts, fixed and variable elements. In practice, however,
such segregation of semi-variable costs is very difficult.
2. It excludes fixed cost for decision – making, which sometimes
may lead to wrong conclusion.
3. It fails to reflect the impact of increased fixed costs due to
development of technology on production costs.
4. Variable cost technique cannot be successfully applied in
“Cost plus contract”.
DECISION MAKING AREAS OR USES OF
MARGINAL COSTING:
1.Fixation of Selling price
2.Decisions relating to most profitable product mix
3.Acceptance or rejection of a special offer
4.Decisions relating to make or buy
5.Retaining or replacing a machine
6.Expanding or Contracting
ABSORPTION COSTING:
Under Absorption Costing Technique, both variable cost and
fixed costs are charged to cost units.
Under Absorption Costing Technique, fixed cost is treated
as product cost.
In other words, the cost of a finished unit in inventory will
include direct materials, direct labour, and both variable and
fixed manufacturing overhead.

Absorption Costing is also known as:

a) Full Costing
b) Full Absorption Method
MARGINAL COSTING VERSUS ABSORPTION
COSTING

The main difference between marginal costing and

absorption costing is that in marginal costing,
variable cost is treated as product cost, and fixed cost
is treated as period cost.
On the other hand, in absorption costing, variable
and fixed costs are treated as product costs.
COST-VOLUME-PROFIT ANALYSIS:

It is a technique that may used by the management to

evaluate how costs and profits are affected by changes in
the volume of business activities.
As a result of change in operating conditions or change in
economic environmental factors, the value of and the
relationship among these variables also change.
Cost-Volume-Profit analysis is the analysis of three
variables i.e., cost, volume and profit.
OBJECTIVES OF C-V-P ANALYSIS:
a) It helps to forecast profit fairly and accurately;
b) It acts as an effective tool of profit planning to the management;
c) It helps in ascertaining break-even point of the product produced
and sold.
d) It is very much useful in setting up flexible budget;
e) It assists the management in the process of performance
evaluation for the purpose of control;
f) It helps in formulating price policies by projecting the effect of
different price structures on costs and profits.
ASSUMPTION OF CVP ANALYSIS:

a)Total cost consists of two components – fixed cost and

variable cost;
b)Selling price per unit remains constant at different volume
of sales;
c) Only one product is sold by the concern or if it sells
multiple product, the sales mix remains constant at
different volume of sales;
d)Volume of production is equal to the sales volume.
ELEMENTS OF CVP ANALYSIS:
1.Marginal Cost Equation: It exhibits the relationship
between the contribution, fixed cost and profit. It explains
that the excess of sales over variable cost is the
contribution towards fixed cost and profit, i.e. S – V = F +
P.
2.Contribution: It is the excess of sales over variable cost,
i.e., C = S – V or C= F + P
3.Profit – Volume Ratio Or P/V Ratio: It is the ratio of
contribution and sales. It is generally expressed in
percentage. It exhibits % of contribution included in sales,
i.e. P/V Ratio = C/S x 100.
4.Break-even Point: It is that level of sales where there is no
profit or no loss. At break – even point, total sales revenue
is equal to total cost.
Any sales above this BEP, a concern earns profit,
whereas any sales below this BEP, the concern suffers loss.
But as there is no profit or loss at BEP, Contribution
from sales at BEP is available towards fixed cost only, i.e.
at BEP, C = F.
5. Margin of Safety: It is the level of sales made above the
break – even point. In other words, Margin of Safety is
the excess of actual sales over BEP sales.
C-V-P VERSUS BREAK EVEN POINT

CVP Analysis refers to the study of the effect on profit

due to changes in cost and volume of output
whereas BE Analysis refers to the study of
determination of that level of activity where total
sales is equal to the total cost and also the study of
determination of profit at any level of activity.
BREAK – EVEN CHART:

It is the graphical presentation of Break – even

Analysis. It depicts the relationship between costs,
sales and profits.
Break Even Chart graphically shows the profit or
loss at various levels of activity and also shows the
level of activity where there is no profit no loss (i.e.
total cost equals total sales)
ANGLE OF INCIDENCE

Angle of Incidence is the angle formed by intersection

of sales line and total cost line at break – even point
in the break – even chart. This angle exhibits the rate
at which profits are being earned by a concern after
reaching the break – even point.
It shows the profit earning capacity of a concern.
Wider angle of incidence exhibits higher profit
earning capacity of the concern or vice – versa.
METHODS OF COSTING:

1.Job Costing
2.Contract Costing
3.Process Costing
4.Service Costing
JOB COSTING:
Job Costing refers to the method of ascertaining costs where
product is manufactured or service is provided against
specific order, as distinct from continuous production for
stock and sale.
Under this method, costs are collected and recorded for
each job, or a batch of similar jobs, under a separate
production order number. Each job has its own
characteristics and needs special treatment.
APPLICATION OF JOB COSTING:
Job costing may be usefully employed in the following organizations:
a) Printing Press: Each item to be printed, whether it is a handout, a book
or an advertising flyer, is a separate job.
b) Garage : Each car to be repaired or tuned up becomes a separate job.
c) Furniture Manufacturer: Each order for furniture is treated as an
individual job.
d) Service Organization stations : A firm of Chartered Accountants is an
example of a service Organization. Each work-order assigned by the
client is treated as a separate job and fees charged accordingly.
e) Construction Companies: Each building is a separate job because each
building has different covered area and a different design.
JOB COSTING PROCEDURE:
A concern using job costing usually adopts the following procedure
for costing purposes:
1. Estimating the job costs: It is useful for submission of tenders and
price quotations. The Costing Department must prepare an
estimate of the total cost for each job before it is undertaken.
2. Allocating job order number: As soon as an order is received and
accepted, it must be assigned a separate job order number.
3. Preparing production order: If the job is accepted, a production
order is made out by the Planning Department.
4.Collecting and recording costs : The costs are collected
and recorded for separately. A job cost sheet is used for
recording and summarizing the cost of materials, labour
and overheads applicable to each job.
5.Comparing actual costs with estimated costs: On
completion of a job, a completion report is sent by the
Production Shop to the Costing Department.