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Marginal Costing

# Marginal Costing

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Marginal costing
Marginal costing

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11/11/2015

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costing

Why do we study Marginal Costing?

What do we study in Marginal Costing?
Marginal Cost Marginal Costing Direct Costing Absorption Costing Contribution Profit Volume Analysis Limiting Factor/key factor Break Even Analysis Profit Volume Chart

What do we study in Marginal Costing? and Why do we Study MC?
Marginal Cost Marginal Costing Direct Costing Absorption Costing Contribution Profit Volume Analysis Limiting Factor/key factor Break Even Analysis Profit Volume Chart

Management Decision Making

. if volume of output is increased or decreased by one unit” .Marginal Cost “Marginal cost is amount at any given volume of out put by which aggregate costs are changed….

Marginal Cost “Marginal cost is amount at any given volume of out put by which aggregate costs are changed if volume of output is increased or decreased by one unit” 1 Marginal Cost 100 x150= 15000 Fixed Cost = 5000 total 20000 2 1 Manufacture 100 radio Variable costs Rs150 p u Fixed cost Rs 5000 2 If Manufacture 101 radios Marginal cost 150 x101=15150 Fixed Cost = 5000 TOTAL 20150 additional Cost=Rs 150 .

Marginal Costing “marginal costing is ascertainment of marginal cost by differentiating between fixed and variable costs and of the effect of changes in volume or type of output” .

Marginal Costing What Could be effects of Changes In volume or Type of output .

Marginal Costing What Could be effects of Changes In volume or Type of output 1 lakh units To 2 lakh units .

Marginal Costing From One Model of Car to Another From One Size of product to another What Could be effects of Changes In volume or Type of output .

Marginal Costing ---Characteristics Fixed & Variable Costs Inventory Valuation MC Costs as Products Costs Contribution Marginal Costing & Profit Fixed Costs as Period Costs Pricing .

Marginal Costing ---Characteristics Segregation Fixed & Variable Costs Semi-variable costs are segregated into fixed & variable .

Marginal Costing ---Characteristics Marginal Costs as Products Costs Only Variable costs are charged to products .

Marginal Costing ---Characteristics Fixed Costs as Period Costs Fixed costs treated Period costs Charged to costing P & L Account .

Marginal Costing ---Characteristics Inventory Valuation WIP & F goods are Valued at Marginal Cost .

Marginal Costing ---Characteristics S-V=C Contribution Profitability judged on Contribution made .

Marginal Costing ---Characteristics Pricing Pricing is based on Contribution & Marginal Costs .

Marginal Costing ---Characteristics A Sales Less VC Contribution Fixed Cost Profit - B - C - Total ----------------Marginal Costing & Profit .

B& C less Total Fixed Cost = less Marginal cost Of C = Contribution of C Profit/loss .Marginal Costing --- Marginal Costing Profit Sales of A Sales of B Sales of C less Marginal cost Of A = Contribution of A less Marginal cost Of B = Contribution of B Total Contribution of A.

Inventory is also valued at total cost. .Absorption Costing “Absorption cost is a total cost technique Under which total cost ie fixed & variable is charged to production.

Absorption-Marginal Costing--differences Fixed & Variable Costs Valuation Of stock Measurement Of Profitability .

Absorption-Marginal Costing--differences Marginal Costing Absorption Costing Fixed & Variable Costs Only variable cost FC charged to P/L Both F & V Costs Are charged .

Absorption-Marginal Costing--differences Valuation Of stock WIP & FS at Marginal Cost Total Cost .

Absorption-Marginal Costing--differences Measurement Of Profitability C=S-V P=S-V-F .

000 1.000 2.000 84.000 1.875 1.000 1.000 1.52.65.20.05.90.000 1.000 _ _ _ _ _ _ 45.625 1.000 3.000 1.04.20.52.000 120.000 1.000 3.65.000 35.000 1.17.000 84.27.05.000 31.25.875 1.000 35.000 37.20.000 84.125 52.05.00.35.55.000 1.00.000 6.000 2.60.000 59.73.04.000 6.000 80.125 4.63.000 2.000 1.000 66.63.000 1.20.000 35.000 2.08.40.625 3.000 1.625 8.33.Comparative Cost Statement Marginal Costing 1 Rs (A)Sales Opening Stock Add V Cost F Cost Total Cost Less C Stock (B) COGS Contribution (A-B)c ( D) F Cost Profit (C-D) (A-B) Months 2 Rs Absorption Costing Total Rs Months 1 Rs 2 Rs 3 Rs Total Rs 3 Rs 2.500 1.60.000 6.35.625 1.000 2.000 1.000 _ _ 2.000 1.20.82.000 1.65.625 1.000 2.05.000 2.00.35.000 35.625 1.35.08.000 35000 45.000 _ _ 2.35.20.00.41.000 2.08.000 _ _ 35.000 1.000 1.000 2.000 2.08.000 99.35000 .500 3.60.000 3.000 84.73.000 94.

60.35.60.000 2.000 59.125 4.08.20.00.20.000 2.25.41.000 37.000 35.000 6.05.35000 .000 1.500 3.000 2.500 1.52.000 2.000 1.000 2.000 _ _ 2.000 3.000 80.625 1.05.000 1.73.000 1.000 1.000 66.63.875 1.000 84.65.000 6.625 1.000 120.000 _ _ 2.20.63.000 2.20.08.000 84.08.05.00.000 94.000 1.000 84.000 2.000 99.000 1.000 2.35.000 1.08.000 1.35.000 3.20.000 _ _ _ _ _ _ 45.35.60.55.65.000 1.40.00.17.000 1.000 _ _ 35.04.000 35.000 1.000 1.875 1.52.82.04.000 6.625 8.000 35.625 1.000 1.27.33.35.000 1.000 1.05.90.000 1.000 3.625 3.625 1.000 35.73.00.000 2.000 35000 45.125 52.Comparative Cost Statement Marginal Costing 1 Rs (A)Sales Opening Stock Add V Cost F Cost Total Cost Less C Stock (B) COGS Contribution (A-B)c ( D) F Cost Profit (C-D) (A-B) Months 2 Rs Absorption Costing Total Rs Months 1 Rs 2 Rs 3 Rs Total Rs 3 Rs 2.000 84.65.20.000 2.000 31.

65.63.60.000 120.000 3.000 59.05.000 1.000 84.000 84.000 31.000 84.000 1.000 1.Comparative Cost Statement Marginal Costing 1 Rs (A)Sales Opening Stock Add V Cost F Cost Total Cost Less C Stock (B) COGS Contribution (A-B)c ( D) F Cost Profit (C-D) (A-B) Months 2 Rs Absorption Costing Total Rs Months 1 Rs 2 Rs 3 Rs Total Rs 3 Rs 2.73.125 52.625 8.000 1.08.875 1.52.35.000 2.000 84.33.000 _ _ 35.000 2.82.00.625 1.000 6.25.35.000 2.05.000 1.500 3.000 35.000 1.000 1.000 2.60.625 1.35.55.000 1.35000 .20.20.000 1.000 1.000 1.000 3.000 2.90.000 _ _ _ _ _ _ 45.000 66.000 3.000 _ _ 2.60.08.000 35.000 35.08.000 2.000 6.40.27.04.00.000 1.000 99.000 94.41.00.17.73.05.35.08.63.000 2.000 35.20.000 1.000 80.00.875 1.35.000 1.125 4.65.52.20.625 1.500 1.000 2.05.000 1.04.20.000 2.625 1.000 35000 45.20.000 2.000 _ _ 2.65.000 1.000 1.625 3.000 6.000 37.

Concept Of Contribution .

Contribution is the difference between sales And the marginal (Variable) cost Contribution =sales-variable cost C= S-V Contribution = Fixed Cost+ Profit C= F+P Therefore S-V = F+P .

Contribution is the difference between sales And the marginal (Variable) cost S-V=F+P If any 3 factors in the equation are known The 4th could be found out P=S-V-F P=C-F F=C-P S=F+P+V V=S-C………. .

000 P=C-F =5.000 F Cost=Rs 4.000+7.PROFIT ? C=S-V Sales =Rs 12.000-4000 =Rs 1.000 =12.000 .000 =Rs 12.000 V Cost=RS 7.000-7000=5000 SALES? S=C+V =5.

000 V Cost=RS 7.000 .000-1.F COST? F=C-P =5.000-5000 =Rs 7.000 =Rs 4.000 V Cost? V=S-C =12.000 F Cost=Rs 4.000 Sales =Rs 12.

000 =20% .000 P/V Ratio =Contribution Sales = C/S =S-V/S V Cost=Rs 8.Profit –Volume Ratio (PV Ratio) (Expresses the relation of Contribution to sales) Sales= Rs 10.000 C = S XP/V Ratio C S = -------P/V Ratio P/V Ratio=c/s =S-V/S =10.000-8000/10.

000 .Profit –Volume Ratio (PV Ratio) When PV Ratio is Given C= SXPV Ratio C= 10000X20% =Rs 20.

0000 2006 22.000 net profit 1000 1600-1000 =-------------------x 100 22000-20000 600 = -----------x100=30% 2.000 1600 .Profit –Volume Ratio (PV Ratio) P/V Ratio = Change in Contribution --------------------------------Change in Sales Change in profit ----------------------Change in Sales Another Method = Year 2005 sales 20.

What Could be the Uses of PV Ratio? Break Even Point Profit at Given Sales Vol required to earn given Profit .

How Improvement in PV Ratio Could be Achieved? Increasing Selling Price Reducing Variable Cost Changing Sales Mix .

Limiting Or Key Factor a factor in short supply .

Limiting Or Key Factor a factor in the activities of an undertaking which at a point of time or over a period will limit the volume of out put .

Limiting Or Key Factor What Could be the Limiting Factors ? Labour Materials Power Sales Capacity Machines …………. .

Volume.Cost.Profit Analysis .

Volume.Cost.Profit Analysis Cost Of Production Selling Prices Volume Produced /Sold .

Cost.Profit Analysis Break Even Analysis Profit Volume Chart .Volume.

Cost.Profit Analysis Break Even Analysis A point of no profit no loss A point where revenue equals cost .Volume.

What are BEP---assumptions All costs are fixed or variable VC remains Constant Total FC remains Constant Selling Price don’t change With Volume Synchronisation of Prod & Sales  No Change in Productivity per workers .

Volume.Profit Analysis Break Even Analysis Methods Algebraic Method Graphic Method .Cost.

Volume.Profit Analysis Fixed Cost BEP (Units) = --------------Contribution PU ALGEBRAIC METHOD = F S-V Fixed Cost BEP (Rs ) = ----------------x Sales Contribution Fixed Cost = -----------------P/V Ratio BEP (Rs) .Cost.

Profit Analysis Fixed Cost BEP (Units) = --------------Contribution PU ALGEBRAIC METHOD = F S-V Fixed Cost BEP (Rs ) = ----------------x Sales Contribution Fixed Cost = -----------------P/V Ratio F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 pu Find BEP BEP (Rs) .Cost.Volume.

Sales Vol.00.Cost.000 Sales at Desired Profit .000 b) Rs 1. a) Rs 60.Profit Analysis Other Uses F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 pu Profit when sales are Profit at diff.Volume.

000 Profit at diff.000 contribution=salesxp/vratio =60000x25% =Rs 15000 Profit =contribution-fixed cost =15000-12000 =Rs3000 . WHEN SALES=Rs 60.Volume. Sales Vol.= 3/12=25% S a) Rs 60.Profit Analysis F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 pu Profit when sales are C P/V Ratio= ----.Cost.00.000 b) Rs 1.

000 Sales at Desired Profit F Cost +Desired Profit Sales= ------------------------------P/V Ratio .Profit Analysis Other Uses F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 pu Sales if desired profit a) Rs 6000 b) Rs 15.Volume.Cost.

Cost- Volume- Profit Analysis
Sales at Desired Profit
F Cost +Desired Profit Sales= ------------------------------P/V Ratio F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 pu Sales if desired profit a) Rs 6000 b) Rs 15,000

12,000+6000 a)Sales= --------------25%

=Rs 72,000

CVP Analysis -question

P ltd has earned a profit of Rs 1.80 lakh on sales of Rs 30 lakhs and V Cost of Rs 21 lakhs. work out a)BEP b)BEP When V Cost decreases by5% c)BEP at present level when selling price reduced by5%

CVP Analysis S-V P/V Ratio=-------S 3000000-2100000 = -----------------------3000000 =30% Sales =VC+FC+P 3000000=2100000+FC+180000 FC =Rs 720000 7,20,000 BEP= ------------30%
=Rs 2400000

CVP Analysis -question
b) When V Cost increases by 5% New Variable Cost=2100000+5% =22,05,000 PV Ratio 3000000-2205000 3000000 =26.5%

BEP

=7,20,000/ 26.5% =Rs 27,16,981

000-21.000 =Rs7.CVP Analysis -question c)When Selling Price reduced by 5% New SP=3000000—5% =Rs 28.453( appx) .32% =Rs 34.= 720000+1800000 PV Ratio 26.00.000 PV Ratio =7500000/2850000 =26.50.32% FC+PROFIT Desired Sales= -----------------.000 Contribution=28.50.19.50.

BEP Graphical Presentation .

FC Q1 Output/Sales . these do not depend on output or sales.Break-Even Analysis Costs/Revenue Initially a firm will incur fixed costs.

the less therefore price charged and firm will incur costs. costs. these do costs – the firm. FC Q1 Output/Sales . have to sell Q1 to determined by forecasts!) is the directly with the generate sufficient expected forecast amount sum of FC+VC revenue to produced cover its sales initially.Break-Even Analysis Costs/Revenue TR TR TC VC The Break-even point Total revenue is As output is The lower the Initially a by firm occurs where total The total costs determined the generated. the will incur fixed revenue equals total price. these vary output or sales. in – (assuming the quantity sold steep the total variable costs – not depend on this example would again this will be accurate revenue curve.

Break-Even Analysis Costs/Revenue TR TR TC VC If the firm chose to set price higher than Rs2 (say Rs3) the TR curve would be steeper – they would not have to sell as many units to break even FC Q2 Q1 Output/Sales .

Break-Even Analysis Costs/Revenue TR) TR TC VC If the firm chose to set prices lower it would need to sell more units before covering its costs FC Q1 Q3 Output/Sales .

Break-Even Analysis Costs/Revenue TR TC Profit VC Loss FC Q1 Output/Sales .

Break-Even Analysis Costs/Revenue TR TR TC VC Margin of safety shows A higher how far sales price can fall before would lower Assume losses the made. sales at = Q2 andfall the could by 800 units beforeof a margin loss would be safety would made widen Margin of Safety FC Q3 Q1 Q2 Output/Sales . breakIf current Q1 = 1000sales and even point Q2 1800.

Interest on debt rises each year – FC rise therefore FC 1 FC Losses get bigger! TR VC Output/Sales .Costs/Revenue High initial FC.

Break-Even Analysis • Remember: • A higher price or lower price does not mean that break even will never be reached! • The BE point depends on the sales needed to generate revenue to cover costs .

Break-Even Analysis • Importance of Price Elasticity of Demand: • Higher prices might mean fewer sales to breakeven • Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even .

‘low’ price – more sales to break even .Break-Even Analysis • Links of BE to pricing strategies and elasticity • Penetration pricing – ‘high’ volume.

Break-Even Analysis • Links of BE to pricing strategies and elasticity • Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even .

Break-Even Analysis • Links of BE to pricing strategies and elasticity • Elasticity – what is likely to happen to sales when prices are increased or decreased? .

Marginal Costing Cost Volume Chart .

Construction Of PV Chart 1 select a scale on Horizontal axis---sales 2 Select a scale on Vertical axis.FC & Profit 3 Plot FC & Profit 4 Diagonal line crosses sales line at BEP .

Profit? .PV Chart Information Fixed Cost =Rs 5000 Sales =Rs 20000(pu RS 20) V Cost= Rs 10000(pu Rs10) Find PV Ratio. BEP.

Construction Of PV Chart 8000 BEP 6000 5000 4000 2000 Fixed Cost Rs 0 5000 10000 15000 Sales Rs 20000 Profit Rs 2000 4000 5000 6000 8000 .

Construction Of PV Chart 8000 BEP 6000 5000 4000 Fixed Cost Rs Profit Area 0 5000 10000 2000 20000 2000 Loss Area 15000 Sales Rs Profit Rs 4000 5000 6000 8000 Margin of Safety -------------------------- .

20%=Rs4000 Fixed Cost New BEP = PV Ratio = 4000/50% =Rs 8000 New Profit=S-F-V =20000-4000-10000 =Rs 6000 .20% decrease in fixed Cost New F Cost= 5000.Effect Of Change in Profit.

20% decrease in FC 8000 6000 BEP 5000 4000 Fixed Cost Rs Profit Area 0 5000 10000 2000 2000 Loss Area 15000 Sales Rs 20000 Profit Rs 4000 5000 6000 8000 .Effect of Change in profit.

10%=Rs9000 New PV Ratio=20000-9000 =55% 20000 Fixed Cost New BEP = PV Ratio = 5000/55% =Rs 9090 Appx New Profit=S-F-V =20000-5000-9000 =Rs 6000 .Effect Of Change in Profit.10% decrease in V Cost New V Cost= 10000.

Construction Of PV Chart 8000 6000 New BEP 5000 4000 Fixed Cost Rs Profit Area 0 5000 10000 2000 20000 2000 Loss Area 15000 Sales Rs Profit Rs 4000 5000 6000 8000 .

.

Effect Of 5% Decrease in Selling Price 8000 6000 5000 4000 Fixed Cost Rs Profit Area 0 5000 10000 2000 20000 2000 Loss Area 15000 Sales Rs Profit Rs 4000 5000 6000 8000 .

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