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Marginal Costing
Marginal Costing
Costing
There are mainly two techniques of determining cost
Marginal Costing:
CIMA defines marginal costing as the accounting
ABSORPTION COSTING
Absorption costing is a costing technique, which does
Variable Costs
Variable costs are costs such as raw materials, direct
maximum profit.
Determining Break Even point.
Choosing from the available alternative method of
production the one which gives highest contribution or
contribution per limiting factor.
Make or buy decision on the basis of higher
contribution
Taking a decision as regard to adding a new product in
the market.
Decisions Based on
Marginal Costing
To plan their operations, manufacturing firms must
decide:
How many units they expect to sell
How many units to produce
How much to spend to produce and sell these units
At what price they must sell the units to make the profit
they want
break-even point.
Break-Even Point
The break-even point is the point at which income
things:
Fixed costs for manufacturing the product
Variable costs for manufacturing each unit of the
product
Expected selling price of each unit of the product
Fixed Cost
Contribution per unit
Margin of Safety
It is the level of sale over and above the break even
point.
MoS = Sales - BEP
Percentage of Margin of Safety
=
(Expected Sales BEP sales) x 100
Expected sales
Sensitivity Analysis
CVP provides structure to answer a variety of what-
if scenarios
What happens to profit if:
Selling price changes
Volume changes
Cost structure changes
List of Formulae:
1) Variable expenses per unit
=
change in cost
change in output
2) Marginal cost equation
Sales Variable Cost = Fixed cost profit /loss
Continue
5) Variable Cost = Sales x (1- P/V ratio)
6) Profit = (Sales x P/V ratio) Fixed cost
7) Sales to earn desired profit =
Fixed expenses + Desired profit
Selling price per unit Variable cost per unit
Continue
8) Margin of safety = Actual sales Break Even sales
or
profit
P/V ratio
9) % of Margin of safety
= (Expected sales BEP sales) x 100
Expected sales
10) P/V ratio =
change in profit ( x 100 for %)
change in sales
Fixed cost : $2000, variable cost : $120 per unit , selling price per unit ; $200
$10,000
Ma
rgi
n
of
saf
ety
Operating
income
Operating income
area
$8,000
Variable
cost
Dollars
$6,000
$5,000
$4,000
Total
costs
line
$2,000
Breakeven point
= 25 units
Operatin
g loss
area
Fixed
cost
x
10
20
25
Units Sold
30
40
Margin of safety
50
The Seattle Contemporary Theater is a newly formed nonprofit enterprise. The theatres
business manager Andrew Lloyd has, made the following projections for the first few
years of operation;
Fixed expenses per month:
Theatre rental
employees salaries and fringe benefits
Actors Wages(to be supplemented with local volunteer talent)
Production crews wages
(to be supplemented with local volunteers)
Playwrights royalties for use of plays
Insurance
Utilities fixed portion
Advertising expenses
Administrative expenses
Total fixed expenses per month
$ 10000
8000
15000
5600
5000
1000
1400
800
1200
$ 48000
$8
2
$ 10
$ 16
Now suppose that the city of Seattle has agreed to refurbish 10 theater
boxes in the historic theatre building. Each box has five seats, which are
more comfortable and affaord a better view of the stage than the
theaters general seating. The board of trustees has decided to charge $
16 per ticket for general seating and $ 20 per ticket for box seats.
Seat type
Regular
Box
seats in theater
450
50
seats available
per month(20 performances)
9000
1000