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Marginal Costing N
Marginal Costing N
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Marginal Cost
Marginal cost means the cost of last or marginal
unit produced.
Marginal cost includes direct material, direct labor
and all other variable overheads.
CIMA, London, defines Marginal cost as” the
amount at any given volume of output by which
aggregate costs are changes if the volume of
output is increased or decreased by one unit.” In
practice it is measured by the total variable cost
attributable to one unit.
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Marginal Costing
Marginal costing may be defined as the
technique of presenting cost data wherein
variable and fixed costs are shown
separately for managerial decision
making.
This is based on differentiation between
fixed and variable costs
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Difference between Marginal Costing and
Absorption Costing
Cost Elements in Product Cost
Cost Elements in Period Cost
Inventory Values
Difference in Net Income
Basis of Managerial Decisions
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Basic Concepts in Marginal costing
1. Basic Equation:
Profit= Sales- Total Cost
Profit= Sales-(Variable Cost+Fixed Cost)
Profit+Fixed Cost =Sales-Variable Cost
Both of this expression sales-variable cost and
profit+fixed cost is technically called as
contribution.
Sales-variable cost=contribution
profit + fixed cost is called as contribution.
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Contribution
Term contribution can be expressed in two
ways:
1. Sales- Variable Cost
2. Fixed Cost +Profit
Contribution is that portion of sales which
remains after recovering variable costs
and is available towards fixed costs and
profits.
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Profit Volume( P/V) Ratio
This ratio is also known as contribution ratio or
marginal ratio.
It expresses the relationship between contribution
and sales. This ratio is expressed as under:
1.P/V Ratio =(Sales- Variable cost)/ Sales
2.P/V Ratio= (Fixed Cost+Profit)/ Sales
P/V Ratio = Change in profit
or
Change in contribution
/ change in sales.
PV ratio is always expressed as percentage.
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Break Even Point
This is a situation of no profit and no loss.
Contribution = Fixed Cost + Profit
At BEP profit is zero , hence at BEP
Contribution = Fixed Cost
At this stage contribution is just enough to cover
Fixed Costs
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It Can be expressed in terms of number of units sold or
value of sales.
1.In terms of quantity= Fixed Cost /contribution per unit
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Margin of safety
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Break Even Analysis
It is a technique used for studying the relationship between
Cost Volume and profit at various level of operations. It
is also called Cost- Volume-Profit Analysis(CVP
Analysis). Profit of the firm are dependent upon many
factors such as
1.Selling price per unit and total sales amount
2.Total cost which in turn may be fixed or variable
3. Volume of sales
Here we try to understand the relationship existing among
these factors and its impact on amount of profit at
various levels of operations.
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The usual starting point is such study is the
determination of breakeven point. But It
must be understood that Break Even
Analysis is not necessarily limited to
seeking break even point. Break Even
Analysis refers to study of relationship
between cost, volume and profit at
different level of sales production which is
technically known as CVP analysis.
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Break Even Point
It is defined as that point of sales volume at
which total revenue is equal to total cost.It
is a point of no profit and no loss.
BEP ( in units) = Fixed Cost
Contribution per unit
BEP ( Rs) = Fixed Cost
P/V Ratio.
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CONVENTIONAL BREAK-EVEN CHART
Y SALES
BREAK-EVEN POINT
FIXED COST
X
0 OUTPUT IN UNITS
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Assumptions of Break Even
Analysis
1. Cost can be classified into fixed and variable
components
2. Variable Cost vary proportionately with volume
changes
3. Fixed cost remains constant irrespective of the level of
activity
4. Selling price does not change with volume changes
5. There is no change in general price level
6. There is only one product or in case of multiple
product, sales mix remains constant
7. Productivity per worker, plant capacity and efficiency
remains unaffected.
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Usefulness of Break Even Analysis
It is considered to be the most useful
technique for profit planning and control.
1. It is simple tool to graphically represent
complicated data.
2. It is also used for problems of product
pricing, Sales mix, adding or deleting
product lines .
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Limitations of Break Even Analysis
1. Application of BEP Analysis to a multi product
firm becomes very difficult.
2. It is considered to be a static tool
3. It is very difficult if not impossible to separate
costs into fixed and variable components
4. The assumptions that fixed cost remains
constant over the entire volume range does
not stand to reason.
5. Variable cost per unit may also change.
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In case of multiple products sales mix
need not necessarily be constant.
Selling price may also change because of
increase or decrease in output, market
demand and supply conditions and
competition etc.
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APPLICATIONS OF MARGINAL COSTING
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Marginal Costing Questions
1.From the following data, calculate P/V
ratio:
Sales 20,000 units @ Rs.20 per unit = Rs.4,00,000
Variable costs @ Rs.15 per unit = Rs.3,00,000
Fixed Costs Rs.80,000.
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2. From the following particulars find out
break-even point:
Fixed Expenses Rs. 1.00.000
Selling price Per unit Rs. 20
Variable cost per unit Rs. 15
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Break-Even Point (Units) = Fixed Cost/ Contribution per unit
BE P in Rs= Fixed Cost/ PV Ratio or BEP units* SP per unit
Contribution per unit=Selling Price per unit - Variable Cost per unit
= Rs. 20 - Rs. 15 = Rs. 5
Break-Even Point (Units)= Rs. 1.00.000/5= 20,000 units
PV ratio = Contribution per unit/ SP per unit
=5/20=.25
BE P in Rs = 20,000 x Rs. 20 = Rs. 4,00,000
or
=1,00,000/.25 = Rs 4,00,000
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3. From the following information calculate :
P I V Ratio
Break-Even Point
Total sales= Rs 5,00,000
Selling price per unit= Rs 100
Variable cost per unit=Rs 60
Fixed cost= Rs 1,20,000
If the selling price is reduced to Rs. 80, Calculate
New Break-Even Point
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Break-Even Point (Units) = Fixed Cost/ Contribution per unit
BE P in Rs= Fixed Cost/ PV Ratio or BEP units* SP per unit
Contribution per unit=Selling Price per unit - Variable Cost per unit
= Rs. 100 - Rs. 60 = Rs. 40
Break-Even Point (Units)= Rs. 1.20.000 / 40= 3000 units
BE P in Rs = 3000 x Rs. 100 = Rs. 3,00,000
If selling price is reduced to Rs 80
Contribution per unit=Selling Price per unit - Variable Cost per unit
= Rs. 80 - Rs. 60 = Rs. 20
Break-Even Point (Units)= Rs. 1.20.000 / 20= 6000 units
BE P in Rs = 6000 x Rs. 80 = Rs. 4,80,000
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4. Sales Rs. 2,00,000
Profit Rs. 20,000
Variable Cost 60%
You are required to calculate:
P I V Ratio
Fixed Cost
Sales volume to earn a profit of 50,000 Rs
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PV RATIO
Sales = Rs. 2,00,000
Variable Cost = 60%
Variable Cost = 60% x 2,00,000=1,20,000
1. P / V Ratio=120000/200000=40%
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Fixed Cost
Contribution=Sales - Variable Cost
or
Contribution= Fixed Cost + Profit
80,000 = 2,00,000-1,20000
80,000= Fixed Cost + Profit
80,000=Fixed Cost + Rs. 20000 29
Sales volume to earn a profit of 50,000
Rs
Let sales be x
Sales – VC-FC= Profit
X-.6x-FC= profit
.4x-60,000=50,000
.4x= 1,10,000
X=2,75,000 Rs
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5. Fixed cost = Rs. 8,000
Break-even point = Rs. 20,000
Variable cost = Rs. 60 per unit
From the above data, calculate:
P / V Ratio
Profit when sales are Rs. 40,000.
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PV Ratio
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Profit when sales are Rs. 40,000
Profit= Sales – VC- FC
= Contribution-FC
PV ratio= Contribution / Sales
40% =Contribution/40,000
Contribution= 16,000
Profit = Contribution - Fixed Cost
= Rs. 16,000 - Rs. 8,000 = Rs. 8,000
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