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Finance SP 54 Pages
Finance SP 54 Pages
The present study “Marginal costing” of Reliance Industry has been designed
to achieve the following objectives: -
1. Distinguish between Direct and Indirect costs, Fixed and Variable
Cost.
2. To judge the financial position of the company basing upon marginal
costing by means of break-even chart.
4. Marginal Costing can help determine which customer are worth keeping
and which are worth eliminating.
1960–1980
The company was co-founded by Dhirubhai Ambani and Champaklal Damani
in 1960's as Reliance Commercial Corporation. In 1965, the partnership
ended and Dhirubhai continued the polyester business of the firm. In 1966,
Reliance Textiles Engineers Pvt. Ltd. was incorporated in Maharashtra. It
established a synthetic fabrics mill in the same year at Naroda in Gujarat. On
08 May 1973, it became Reliance Industries Limited. In 1975, the company
expanded its business into textiles, with "Vimal" becoming its major brand in
later years. The company held its Initial public offering (IPO) in 1977. The
issue was over-subscribed by seven times. In 1979, a textiles company
Sidhpur Mills was amalgamated with the company. In 1980, the company
expanded its polyester yarn business by setting up a Polyester Filament Yarn
Plant in Patalganga, Raigad, Maharashtra with financial and technical
collaboration with E. I. du Pont de Nemours & Co., U.S.
1981–2000
In 1985, the name of the company was changed from Reliance Textiles
Industries Ltd. to Reliance Industries Ltd. During the years 1985 to 1992,
the company expanded its installed capacity for producing polyester yarn
by over 145,000 tonnes per annum. The Hazira petrochemical plant was
commissioned in 1991–92.
In 1993, Reliance turned to the overseas capital markets for funds
through a global depositary issue of Reliance Petroleum. In 1996, it
became the first private sector company in India to be rated by
international credit rating agencies. S&P rated Reliance "BB+, stable
outlook, constrained by the sovereign ceiling". Moody's rated "Baa3,
Investment grade, constrained by the sovereign ceiling”. In 1995/96,
the company entered the telecom industry through a joint venture
with NYNEX, USA and promoted Reliance Telecom Private Limited in
India. In 1998/99, RIL introduced packaged LPG in 15 kg cylinders
under the brand name Reliance Gas. The years 1998–2000 saw the
construction of the integrated petrochemical complex at Jamnagar in
Gujarat, the largest refinery in the world.
2001 onwards
In 2001, Reliance Industries Ltd. and Reliance Petroleum Ltd. became
India's two largest companies in terms of all major financial parameters. In
2001–02, Reliance Petroleum was merged with Reliance Industries.
In 2002, Reliance announced India's biggest gas discovery (at the Krishna
Godavari basin) in nearly three decades and one of the largest gas discoveries
in the world during 2002. The in-place volume of natural gas was in excess of 7
trillion cubic feet, equivalent to about 1.2 billion barrels of crude oil. This was
the first ever discovery by an Indian private sector company.
In 2002–03, RIL purchased a majority stake in Indian Petrochemicals
Corporation Ltd. (IPCL), India's second largest petrochemicals company, from
the government of India. IPCL was later merged with RIL in 2008.
In 2005 and 2006, the company reorganized its business by demerging its
investments in power generation and distribution, financial services and
telecommunication services into four separate entities.
In 2006, Reliance entered the organized retail market in India with the launch
of its retail store format under the brand name of 'Reliance Fresh'. By the end
of 2008, Reliance retail had close to 600 stores across 57 cities in India.
In November 2009, Reliance Industries issued 1:1 bonus shares to its
shareholders.
MUKESH AMBANI
Mukesh Dhirubhai Ambani (born 19 April 1957) is an Indian business
magnate, the chairman, managing director, and the largest shareholder of
Reliance Industries Limited(RIL), a Fortune Global 500 company and India's
most valuable company by its market value. According to the Forbes
magazine, he is the richest Asian and the 13th richest person in the world as
of March 2019.
ANIL AMBANI
Anil Dhirubhai Ambani (born 4 June 1959) is an Indian businessman. He is the
chairman of Reliance Group (also known as Reliance ADA Group), which came
into existence in July 2006 following a demerger from Reliance Industries
Limited. He leads a number of stock listed corporations including Reliance
Capital, Reliance Infrastructure, Reliance Power and Reliance Communications.
As of February 2019, Ambani's net worth was $1.7 billion. According to Forbes
magazine, in 2006, he was the 6th richest person in the World.
INTRODUCTION TO MARGINAL COSTING
The costs that vary with a decision should only be included in decision
analysis. For many decisions that involve relatively small variations from
existing practice and/or are for relatively limited periods of time, fixed costs
are not relevant to the decision. This is because either fixed costs tend to be
impossible to alter in the short term or managers are reluctant to alter them
in the short term. Marginal costing distinguishes between fixed costs and
“is its variable cost”. This is normally taken to be; direct labor, direct
the volume of output can be clearly brought out. Marginal costing ascertains
marginal or variable costs & the effect on profit, of the changes in volume or
costs are excluded. The difference which arises between the variable costs
incurred for activities & the revenue earned from those activities is defined
as the gross margin or contribution. It may relate to total sales or may relate
to one unit.
contribution. The fixed costs of the business are paid from this „pool‟
& then the part of the total contribution which remains becomes the
Marginal costing is a costing technique wherein the marginal cost, i.e. variable
cost is charged to units of cost, while the fixed cost for the period is completely
written off against the contribution. The term marginal cost implies the
additional cost involved in producing an extra units of output which can be
reckoned by total variable cost assigned to one unit. It can be calculated as
Marginal Cost =Direct Material + Direct Labour + Direct Expenses + Variable
Overheads
Features of Marginal costing
Classification of costs into fixed costs & variable costs is done under
This technique is used to ascertain the marginal cost and to know the
All costs are classified on the basis of variability into fixed cost and
variable costs.
Marginal costs are treated as the cost of the product or service. Fixed
costs are charged to costing Profit and Loss account of the period in
of marginal costs.
The marginal of separating semi variable or semi fixed cost into their
variable & fixed elements is an arbitrary exercise which at different levels
of output may be subject to influctuation & inaccuracy. Consequently a
substantial degree of error may be contained in the basic cost of
information which is used in decision making marginal.
➢ When selling price are based on marginal costing great care need to be
exercised as in long run all fixed overheads should be covered by the
prices & a reasonable margin over & above the total costs should be
left.
➢ Under many circumstances the deduction of contribution made by
some production units can be difficult. There by the effectiveness of
the system is lost.
➢ Since on the basis of variable cost only the valuation of stock of
finished goods & work in progress is done they are always
understated. As a result profit is also understated.
5 years economists have added the benefits of marginal cost based prices &
have advocated their use . Not until fairly recently however has the concept
of marginal cost pricing received a widespread attention in electric utility rate
setting in the United States. Economists theory states that maximum
economic benefits to society can be achieved if prices are set equal to the
marginal cost the customer will pay an amount that adequately reflects the
cost to the society of producing the product. In this way economic efficiency
is achieved in that society’s scarce resources are used in productive marginal
where the prices of finished goods & services adequately reflect the actual
costs of producing them.
ABSORBTION COSTING
It refers to the analysis of the cost data for the purpose of allotment of costs
to cost units. In average costing fixed as well as variable cost are charged to
products. We have seen in marginal costing that now the direct costs &
overheads whether fixed or variable are charged to the individual product,
marginal or contract. The technique of Average costing thus refers to
principle of allocation apportionment & absorption of costs used for
ascertaining the cost of product, marginal or contract.
Disadvantage and Advantage of Absorption Costing
impractical, dividing costs into the variable and fixed cost elements as
within the relevant range. Fixed costs remain unchanged at any level
2. The behaviour of total revenues and total costs will be linear over the
relevant range, i.e. will appear as a straight line on the BE chart. This
horizontal line on the graph within the relevant range; and that selling
price is constant.
proportion of units (sales mix) sold will not change. This cannot
always be correct. Sales mix ratio may be due to the change in the
to be almost (if not exactly) equal to the sales volume, which causes
ending inventories.
What is Cost Volume Profit Analysis?
Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at
the impact that varying levels of costs and volume have on operating profit.
The cost-volume-profit analysis, also commonly known as break-even analysis,
looks to determine the break-even point for different sales volumes and cost
structures, which can be useful for managers making short-term economic
decisions. The cost-volume-profit analysis makes several assumptions,
including that the sales price, fixed costs, and variable cost per unit are
constant. Running this analysis involves using several equations for price, cost
and other variables, then plotting them out on an economic graph.
Marginal Costing and Decision Making
The supreme goal of every management is to maximise profit. To achieve this
goal, management has to take several decisions regarding the marginal unit,
the product mix, the pricing, making and buying of any article and so on.
Marginal Costing also helps in ‘profit planning’ .Marginal Costing enables the
management to study different scenario (Cost and revenue situations) under
various alternatives. The management can plan it’s short-term profits
When marginal costing is useful for fixing price?
Marginal Costing helps the management in taking price decisions .In
absorption costing, the prices are fixed so as to cover the total cost which
includes fixed cost as well as variable cost. In marginal costing the price can
only be fixed on the basis of variable costs. This can be useful in the following
situations: When supply exceeds demand. b. Pricing of new products. c. Utility
Services. d. Cut- throat Competition in market. e. Export Orders or Special
Orders
1. Contribution
=Sales-Variable Cost
=Fixed Cost+ Profit
=Sales+ P.V Ratio
= (B.E Sales in units*Contribution Per units) +Profit
= (B.E Sales in value*PVR)+ Profit
=Fixed Cost+ (MS in units*Contribution Per unit)
=Fixed Cost+ (MS in value*PVR)
=Profit/MS in%
=Fixed Cost/B.E sales in %
2. Profit Volume Ratio (PVR)
=Sales-Variable Cost/Sales*100
=Contribution/Sales*100
=Fixed Cost+ Profit/Sales*100
=Fixed Cost +B.E Sales in value*100
=Fixed Cost+ B.E Sales in units*100/Selling Price per unit
=Profit/Margin of Safety in value*100
=Profit/Margin of Safety in units*100/Selling Price per unit
=Change in Profit/Change in Sales*100
=100-Variable Cost to Sales Ratio
3. B.E Sales in units
=Fixed Cost/Contribution Per Unit
=B.E Sales/Selling Price
=Fixed Cost/S.P per Unit-Variable Cost per unit
=Actual Sales per unit- Margin of Sales in units
4: B.E SALES IN VALUE
=Fixed cost /PVR
= Actual sales in value –margin of safety in value
=Fixed cost / contribution per unit * Selling price per unit
= BE Sales in units * Selling price per unit
= Fixed Cost /1- Variable Cost / Sales
= Fixed Cost /% of Contribution5
5. B.E SALES IN % OF SALES
= Fixed Cost / Contribution *100
= BE Sales / Actual Sales * 100
= 100 –margin of safety (in%)
Types or Techniques of Costing
Following are the main types or techniques of costing for ascertaining costs:
1. Uniform Costing: It is the use of same costing principles and/or practices by
several undertakings for common control or comparison of costs.
2. Marginal Costing: It is the ascertainment of marginal cost by differentiating
between fixed and variable cost. It is used to ascertain the effect of changes in
volume or type of output on profit.
3. Standard Costing: A comparison is made of the actual cost with a pre-
arranged standard cost and the cost of any deviation (called variances) is
analysed by causes. This permits management to investigate the reasons for
these variances and to take suitable corrective action.
4. Historical Costing: It is ascertainment of costs after they have been incurred.
It aims at ascertaining costs actually incurred on work done in the past. It has a
limited utility, though comparisons of costs over different periods may yield
good results.
5.Direct Costing: It is the practice of charging all direct costs, variable and
some fixed costs relating to operations, processes or products leaving all other
costs to be written off against profits in which they arise.
6. Absorption Costing: It is the practice of charging all costs, both variable and
fixed to operations, processes or products. This differs from marginal costing
where fixed costs are excluded.
MARGINAL COSTING EQUATIONS
1. Sales-variable Cost=Contribution
2. Contribution – Fixed Cost=Profit
3. Sales-Variable Cost=Fixed Cost+ Profit
4. Profit Volume Ratio=Contribution/Sales
5. Contribution=Sales*P.V Ratio
6. Sales=Contribution/P.V Ratio
7. B.E.P (in units) = Fixed Cost/Contribution per Unit
8. B.E.P (in rupees) = Fixed Cost/Contribution*Sales
9. B.E.P (in rupees) = Fixed Cost/P.V Ratio
10. Required Sales (in Rupees) = Fixed Cost+ Profit/P.V Ratio
11. Required Sales (in units) = Fixed Cost+ Profit/Contribution per Unit
12. Actual Sales=Fixed Cost+ Profit/P.V Ratio
13. Margin Of Safety (in rupees) = Actual Sales-B.E.P Sales
14. Margin Of Safety (in units) = Actual Sales(units)-B.E.P Sales(units).
15. Profit = Margin of Safety*P.V Ratio
ABSORPTION COSTING PRO-FORMA
£ £
ADD Xx
(Closing stock – opening Stock) x
OAR
£ £
Contribution xxxxx
Q.1 The Vijay Electronic Co. furnishes you the following income information of the year
1995.
Rs
Second half
…………..
From the above table you are required to compute the following assuming that the
(d) Variable cost for first and second half of the year.
Rs
…………..
Difference
…………..
= 21,600/1,08,000*100 =20%
S*(S/V) = F+P
4,05,000*20/100 = F+10,800
Or 81,000 = F+10,800
= 1,04,400/20% = Rs 7,02,000
Or 4,05,000-81,000 = VC
Or VC = Rs 3,24,000
5,13,000-VC = 70,200+32,400
5,13,000-VC = 1,02,600
5,13,000-1,02,600 = VC
VC = Rs 4,10,400
3,24,000*20% = 1,40,400+Profit/Loss
64,800 = 1,40,400+Profit/Loss
Loss = Rs 75,600
Sales*(20%) = 1,40,400+54,000
Sales*20/100 = 1,94,400
Economy. Overheads are incurred on the basis of labour hours. Wages are paid at Re
1.00 per hour. Estimates for the cases show the following:
The manufacture felt that he would be well advised to discontinue producing the
Deluxe and economy cases even though it would mean that some of production
facilities would remain unused. He cannot increase the sale of luxury cases. It has
Contribution
5.20 6.60 5.40
Less: Fixed Cost (60%)
2.20 3.60 2.40
Net Profit / Loss
Note: The above statement clearly explains that product Deluxe is incurring loss and
also its P/V Ratio is less as compared to other two products. Hence it is advisable, that
the manufacturer should discontinue the product “Deluxe” and increase the
The data collected were edited, classified and tabulated for analysis. The
analytical tools used in this study.
a) Analytical tool applied