Arginal Osting by Dinesh Phadtare

marginal costing
By Dinesh Phadtare
What do we study in Marginal Costing?
Marginal Costing
Contribution
Profit Volume Analysis
Break Even Analysis
Profit Volume Chart
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
1 lakh units
In volume To
2 lakh units
or
Type of output
Marginal Costing
From One
What Could be effects of Model of
Car to
Changes
Another
In volume
or From One
Type of output Size of
product to
another
Marginal Costing ---Characteristics
Fixed & Variable Inventory

Costs Valuation
Marginal Costing
MC Costs as
Contribution &
Products Costs
Profit
Fixed Costs as
Pricing
Period Costs
Comparative Cost Statement
Marginal Costing Absorption Costing

Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000

6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000
Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _
( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _
Profit (C-D) 45,000 31,000 59,000 1,35,000

(A-B)
45,000 37,125 52,875 1,35000
Comparative Cost Statement
Marginal Costing Absorption Costing

Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000

6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000
Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _
( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _
Profit (C-D) 45,000 31,000 59,000 1,35,000

(A-B)
45,000 37,125 52,875 1,35000
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……….
PROFIT ? SALES?
C=S-V
Sales =Rs 12,000
=12,000-7000=5000 S=C+V
V Cost=RS 7,000 P=C-F

=5,000+7,000
F Cost=Rs 4,000 =5,000-4000 =Rs 12,000
=Rs 1,000
F COST? V Cost?
Sales =Rs 12,000 F=C-P V=S-C

V Cost=RS 7,000
=5,000-1,000 =12,000-5000
F Cost=Rs 4,000 =Rs 7,000
=Rs 4,000
Profit –Volume Ratio (PV Ratio)
(Expresses the relation of Contribution to sales)
Sales= Rs 10,000
V Cost=Rs 8,000
P/V Ratio =Contribution = C/S =S-V/S
Sales
C = S XP/V Ratio
P/V Ratio=c/s
C
=S-V/S
S = --------
=10,000-8000/10,000
P/V Ratio
=20%
When PV
Ratio is
Given
C= SXPV Ratio
C= 10000X20%
=Rs 20,000
Change in Contribution
P/V Ratio = --------------------------------- Another Method
Change in Sales
Change in profit
= -----------------------
Change in Sales
Year sales net profit
2005 20,000 1000

1600-1000
=-------------------x 100
2006 22,000 1600
22000-20000
600
= -----------x100=30%
2,0000
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

Cost- Volume- Profit
Analysis
Break Even Analysis
Profit Volume Chart

Analysis
Break Even Analysis
A point of no profit no loss
A point where revenue equals cost

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
Analysis
Break Even Analysis
Methods
Algebraic Method
Graphic Method
Analysis ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V
Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
Fixed Cost
BEP (Rs) = ------------------
P/V Ratio
Analysis ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V
Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
F Cost=Rs 12000
Fixed Cost S Price=Rs12 pu
BEP (Rs) = ------------------ V Cost =Rs 9 pu
P/V Ratio
Find BEP
Analysis
F Cost=Rs 12000
S Price=Rs12 pu
Profit at diff. Sales Vol. V Cost =Rs 9 pu
Profit when sales are

C
P/V Ratio= ----- = 3/12=25% a) Rs 60,000
S b) Rs 1,00,000
WHEN SALES=Rs 60,000
contribution=salesxp/vratio
=60000x25%
=Rs 15000
Profit =contribution-fixed cost
=15000-12000
=Rs3000
Analysis
Other Uses F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Sales at Desired Profit Sales if desired profit

a) Rs 6000
b) Rs 15,000
F Cost +Desired Profit

Sales= -------------------------------
P/V Ratio
Analysis
Sales at Desired Profit F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
F Cost +Desired Profit
Sales= ------------------------------- Sales if desired profit
P/V Ratio a) Rs 6000
b) Rs 15,000
12,000+6000
a)Sales= ---------------
25%
=Rs 72,000
Break-Even Analysis
• 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
BEP
Graphical Presentation
Break-Even Analysis
Costs/Revenu
e Initially a firm
will incur fixed
costs, these do
not depend on
output or sales.
FC
Q1 Output/Sales
Break-Even Analysis
The Break-even
Total revenue point
is
As
The output
lower
Initially is
a by the
firm
The
occurs total
where
determined coststotalthe
Costs/Revenu TR
generated,
price,
will
revenue
therefore incur
equals the
the less
fixed
total
e
TR TC price
firm
costs
charged
will
costs,
– the incur
these
firm,
and
doin –
VC steep
(assuming
the thecosts
quantity
variable total
sold –
this not
again depend
example
this on
would
will be
accurate
revenue
these vary curve.
have output
to sell
determined orQ1sales.
to
bythe
forecasts!)
directly
generate
is
with
sufficient the
expected
sum of FC+VC
amount forecast
revenue to produced
cover its
sales initially.
costs.
FC
Q1 Output/Sales
Break-Even Analysis
Costs/Revenue If the firm chose
TR TR TC to set price higher
VC 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
TR)
Costs/Revenue If the firm chose
TR
TC to set prices lower
VC it would need to
sell more units
before covering
its costs
FC
Q1 Q3 Output/Sales
Break-Even Analysis
TR
Costs/Revenue TC
Profit VC
Loss
FC
Q1 Output/Sales
Break-Even Analysis
Margin of
TR TR
TC safety shows
Costs/Revenue A far
how higher
sales can
VC price
fall beforewould
losses
Assume
made. If Q1
lower the=
current
1000 and Q2 sales
=
break
1800,
even
at Q2sales could
point
fall by 800and the
units
margin
before a lossof
would
safetybe made
would
widen
Margin of Safety
FC
Q3 Q1 Q2 Output/Sales
USES OF BEA
 Helps to determine the BEP

 Helps to determine the sales volume and
selling price
 Helps to determine the effect of selling
price on profit
 Profitability of various firms can be
compared
 Helps management in decision making
LIMITATION OF BEA
 Inaccuracy
 Fixed cost remains constant is unrealistic

sometimes
 Selling prices remains unchanged as

volume changes is also not true
THANK YOU

Arginal Osting by Dinesh Phadtare

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Arginal Osting by Dinesh Phadtare

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marginal costing

“marginal costing is ascertainment of

and of the effect

What Could be effects of

What Could be effects of

Fixed & Variable Inventory

Marginal Costing Absorption Costing

(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000

Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _

( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1,35,000

Marginal Costing Absorption Costing

(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000

Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _

( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1,35,000

If any 3 factors in the equation are known

V Cost=RS 7,000 P=C-F

Sales =Rs 12,000 F=C-P V=S-C

2005 20,000 1000

Break Even Point

Profit at Given Sales

Vol required to earn given Profit

Increasing Selling Price

Reducing Variable Cost

Changing Sales Mix

Break Even Analysis

Profit Volume Chart

A point of no profit no loss

A point where revenue equals cost

All costs are fixed or variable

Profit when sales are

WHEN SALES=Rs 60,000

Sales at Desired Profit Sales if desired profit

F Cost +Desired Profit

• The BE point depends on the sales

 Helps to determine the BEP

 Fixed cost remains constant is unrealistic

 Selling prices remains unchanged as

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