 AMUL –an short overview

Type Cooperative society

Industry Dairy/fast-moving consumer good (FMCG)
Founded 1946; 73 years ago
Founder Tribhuvandas Patel
Headquarters Anand, Gujarat, India
Area served Worldwide
Key people Rupinder Singh Sodhi (Managing Director)
Revenue ₹38,000 crore (US$5.5 billion) (2018-19)
Number of employees 752 (Marketing Arm)
3.6 million (Milk producing members)

Amul is an Indian cooperative dairy company, based at Anand in the state of Gujarat

Formed in 1956, it is a cooperative brand managed by a cooperative body, the Gujarat Co-
operative Milk Marketing Federation Ltd. (GCMMF), which today is jointly owned by 3.6
million milk producers in gujrat

The name Amul derived from sanskrit word amulya which means priceless

Amul spurred India's White Revolution, which made the country the world's largest producer
of milk and milk products.

Amul was spearheaded by Tribhuvandas Patel under the guidance of Sardar Vallabhbhai
Patel. As a result, Kaira District Milk Union Limited was born in 1946. Tribhuvandas became
the founding chairman of the organization and led it until his death. He hired Dr. Verghese
Kurien in 1949. He convinced Dr. Kurien to stay and help with the mission.

Kurien, founder-chairman of the GCMMF for more than 30 years (1973–2006), is credited/
with the success of Amul's marketing .Amul has ventured into markets overseas
Company Profile

Gujarat Cooperative Milk Marketing Federation Ltd. (GCMMF), is India's largest food
product marketing organisation with annual turnover (2011-12) US$ 2.5 billion. Its daily milk
procurement is approx. 13 million lit (peak period) per day from 16,117 village milk
cooperative societies, 17 member unions covering 24 districts, and 3.18 million milk
producer members.

It is the Apex organisation of the Dairy Cooperatives of Gujarat, popularly known

as 'AMUL', which aims to provide remunerative returns to the farmers and also serve the
interest of consumers by providing quality products which are good value for money. Its
success has not only been emulated in India but serves as a model for rest of the World. It is
the exclusive marketing organisation of 'Amul' and 'Sagar' branded products. It operates
through 47 Sales Offices and has a dealer network of 5000 dealers and 10 lakh retailers, one
of the largest such networks in India. Its product range comprises milk, milk powder, health
beverages, ghee, butter, cheese, Pizza cheese, Ice-cream, Paneer, chocolates, and
traditional Indian sweets, etc

GCMMF is India's largest exporter of Dairy Products. It has been accorded a "Trading
House" status. Many of our products are available in USA, Gulf Countries, Singapore, The
Philippines, Japan, China and Australia. GCMMF has received the APEDA Award from
Government of India for Excellence in Dairy Product Exports for the last 13 years. For the
year 2009-10, GCMMF has been awarded "Golden Trophy' for its outstanding export
performance and contribution in dairy products sector by APEDA.

For its consistent adherence to quality, customer focus and dependability, GCMMF has
received numerous awards and accolades over the years. It received the Rajiv Gandhi
National Quality Award in1999 in Best of All Category. In 2002 GCMMF bagged India's
Most Respected Company Award instituted by Business World. In 2003, it was awarded the
The IMC Ramakrishna Bajaj National Quality Award - 2003 for adopting noteworthy quality
management practices for logistics and procurement. GCMMF is the first and only Indian
organisation to win topmost International Dairy Federation Marketing Award for probiotic
ice cream launch in 2007.

The Amul brand is not only a product, but also a movement. It is in one way, the
representation of the economic freedom of farmers. It has given farmers the courage to
dream. To hope. To live.
Besides India, Amul has entered overseas markets such
as Mauritius, UAE, USA, Oman, Bangladesh, Australia, China, Singapore, Hong
Kong and a few South African countries. Its bid to enter Japanese market in 1994 did
not succeed, but it plans to venture again.

Milestones of GCMMF:

 2.8 million milk producer member families

 13,759 village societies
 13 District Unions
 8.5 million litres of milk procured per day
 Rs. 150 million disbursed in cash daily
 GCMMF is the largest cooperative business of small producers with an annual
turnover of Rs. 53 billion
 The Govt. of India has honoured Amul with the “Best of all categories Rajiv Gandhi
National Quality Award”.
 Largest milk handling capacity in Asia
 Largest Cold Chain Network
 48 Sales offices, 3000 Wholesale Distributors, 5 lakh retail outlets
 Export to 37 countries worth Rs. 150 crores
 Winner of APEDA(The Agricultural and Processed Food products Export
Development Authority) award for nine consecutive years

Total turnover of amul

 Overview of GCMMF

Years of establishment 1973

members 18 district cooperative milk producer unit
No of the producer 3.6 million
No of the village's societies 18554
Total milk holding capacity 35 million
Milk collection 23 million
Sales turnover Rs33150crore/ ($4.8 Billion)
Countries where Amul exports
History of amul

Amul cooperative registered on 19 December 1946 as a response to the exploitation of

marginal milk producers by traders or agents of the only existing dairy, the Polson dairy, in
the small city distances to deliver milk, often went sour in summer, to Polson. The prices of
milk were arbitrarily determined. The government had given monopoly rights to Polson to
collect milk from Kiara and supply it to a Mumbai city.

Angered by the unfair trade practices, the farmers of Kiara approached Sardar Vallabhbhai
Patel under the leadership of local farmer leader Tribhuvandas K. Patel. He advised them to
form a cooperative (Kiara District Co-operative Milk Producers' Union) and supply milk
directly to the Bombay Milk Scheme instead of Polson (who did the same but gave them low
prices). He sent Morarji Desai to organise the farmers. In 1946, the milk farmers of the area
went on a strike which led to the setting up of the cooperative to collect and process milk
.Milk collection was decentralized, as most producers were marginal farmers who could
deliver, at most, 1–2 litres of milk per day. Cooperatives were formed for each village, too.By
June 1948, the KDCMPUL had started pasteurizing milk for the 'Bombay Milk Scheme'.
Under the selfless leadership of Tribhuvandas Patel, in 1973, Amul celebrated its 25th
Anniversary with Morarji Desai, Maniben Patel and Verghese Kurien.

The cooperative was further developed and managed by Dr. Verghese Kurien with H.M.
Dalaya. Dalaya's innovation of making skim milk powder from buffalo milk (for the first
time in the world) and a little later, with Kurien's help, making it on a commercial scale,[11]
led to the first modern dairy of the cooperative at Anand, which would compete against
established players in the market. Kurien's brother-in-law K.M. Philip sensitized Kurien to
the needs of attending to the finer points of marketing, including the creation and
popularization of a brand.

The trio's (T. K. Patel, Kurien and Dalaya's) success at the cooperative's dairy soon spread to
Anand's neighbourhood in Gujarat. Within a short span, five unions in other districts –
Mehsana, Banaskantha, Baroda, Sabarkantha and Surat – were set up, following the approach
sometimes described as the Anand pattern.[8]

In 1970, it spearheaded the White Revolution of India. To combine forces and expand
the market while saving on advertising and avoid competing against each other, the
Gujarat Co-operative Milk Marketing Federation Ltd., an apex marketing body of
these district cooperatives, was set up in 1973. The Kaira Union, which had the brand
name Amul with it since 1955, transferred it to GCMMF.
In 1999, it was awarded the "Best of all" Rajiv Gandhi National Quality Award.

Technological developments at Amul have subsequently spread to other parts of India.

The GCMMF is the largest food products marketing organisation of India. It is the apex
organisation of the dairy cooperatives of Gujarat. It is the exclusive marketing organisation
for products under the brand name of Amul and Sagar. Over the last five and a half decades,
dairy cooperatives in Gujarat have created an economic network that links more than 3.1
million village milk products with millions of consumers in India.

On September 30, 2018, Prime Minister Narendra Modi inaugurated Amul's chocolate plant
in Mogar, Anand near their headquarters.

Amul range of products

AMUL defending its turf has changed retail environment, striked out on its own, with AMUL
Outlets or parlours to deliver consumers total brand experience. Launched in 2002, there are
now 400 AMUL parlours across the country, which contributed 3% to the brand’s total
turnover last
year. AMUL parlours are today present on campuses of the Infosys, Wipro, IIM-A, IIT-B,
Temples, Metro rail and railway stations in Gujarat.
AMUL is the largest milk brand in Asia, marketing more than 30 different brands of dairy
products like cheese, ice-cream, condensed milk, ready-to-eat pizza, beverages etc. AMUL
Kool and Kool Café are doing well. AMUL has done well defending itself against names like
Mahananda, Vijay, Milma and other co-operative milk brands and also against FMCG and
F&B brands like Britannia, Nestle and Mother Dairy.
AMUL has largest chunk of market share of mare than 86 % . AMUL has introduced a
number of diverse range of varied products like cooking butter, low fat butter etc along its
main product. Hence covering all the segments in which a competitor can enter, thus creating
strong barriers and in turn playing offence to defend its market position
AMUL ice creams has 24.75 % market share in caparison to Mother Dairy share of 8.66% &
the market leader HUL- kwality walls share of 28.22%. AMUL is constantly engaged in
deriving its counter strategy to grow its market share. AMUL has offered Pro-biotic Ice-
creams for health concious individuals. This can be a promising product to keep family
healthy and strong. The product was launched with this in view.
AMUL chocolate market share is merely 10 % compared with 70 %share of the market
leader, Cadbury. AMUL is reworking its strategy in the chocolate category to push its
chocolate product sales. AMUL's strategy is to identify the market gaps and fill them
suitabely.
 Industry Analysis

Porter’s five forces for dairy and processed food industry in India

Threat of Entry (high)

 Capital Requirements (low)

 Economies of Scale (low)
 Absolute Cost Advantages (high)
 Product Differentiation (high)
 Access to Channels of Distribution (low)
 Governmental and Legal Barriers (high)
 Retaliation (high)
Industry Rivalry (high)

 Concentration (high)
 Diversity of competitors (low)
 Product differentiation (high)
 Excess capacity and exit barriers (moderate)
 Cost conditions (high)

Bargaining power of buyers (high)

Due to large number of options and substitute products present from competitors, the buyers
have very high bargaining power. Buyer switching cost is minimal and availability of
information makes the buyers all the more powerful.

Bargaining power of suppliers (low)

In food processing and dairy industry, the huge number of available suppliers makes it easier
for the companies to negotiate with them. Threat of backward integration is also present.

Threat of substitutes (high)

Pressure from Substitutes Emerges Mainly From Two Factors

 Switching costs for customers to the substitute (low)

 Buyer willingness to search out for substitutes (very high)
Overall it’s a highly competitive industry having very high effect of all the Porter’s forces. So
it’s not an attractive industry.

Value Chain

Customer – Large customer population consisting of households and businesses of various

sizes.

Suppliers – 2.12 million farmers and milk producers, more than 10,000 village level milk
collection
centres.

Competitors – Competition from organised as well as unorganised sectors. ITC, HUL, Nestle,
Brittania etc are competing in the organised sector with Amul whereas
unorganised
sector gives a tough competition in the form of milkmen and delivery boys
etc

Complementors – Hotel, catering houses and corporations.

Industry driving forces of dairy and processed food industry

 Abundant availability of raw material

India has varied agro climatic conditions; it has a wide-ranging and large raw material base
suitable for food-processing industries.

 Demographic trends

The food-processing industry has a bright future due to demographic environment in India,
which is a key positive. Rising income levels leading to large customer base India with its
population of more than 1 billion accounts for close to 17% of the global population. It is one
of the most attractive consumer markets in the world with the increase in income levels
across the population segments. The increase in income levels and higher tendency to spend
provides great opportunities for companies across various sectors

 Relatively young population

India has a relatively young population with close to 55% of population in the age group of
20- 59 years. This group is also high in consumption and therefore, this trend is expected to
provide a further boost to the growth of consumption in India.
Key success factors for companies involved in food processing in India:

 Development of effective distribution network and supply chain

 Various range of product offerings, which is customized to meet local market
requirements
 Superior processing technology to compete with other players in the market
 Brand building and marketing to gain market share; increasing penetration in
domestic market;
 Competitive pricing

Core competency of Amul

 The 3 tier revolutionary Amul model which has changed lives of millions of milk
producers across villages and improved their lives is the biggest core competency of
Amul when compared with other companies in the market. It is a model which no
company can replicate and boast of in the dairy industry.
  Unmatched supply chain network in the entire country leading to optimum product
reach even to the remotest village in India

SWOT Analysis of Amul

Strengths
1. Huge brand name and trust factor associated with the company. The company is having
Indian origin thus creating feeling of oneness in the mind of the customers.

2. It manufactures milk, milk products, sweets and processed food which is purely vegetarian
thus providing quality confidence in the minds of the customers.

3. It aims at rural segment, which covers a large area of loyal customers, which other
companies had failed to do.

4. People are quite confident for the quality products provided by Amul.

Weaknesses
1. Lack of investment as compared to other MNEs
2. Poor product replacement policy

Opportunities
1. There is a lot of potential for growth and development as huge population stay in rural
market where other companies are not targeting.

2. The chocolate market is at growth stage with very less competition so by introducing new
brand and intensive advertising there can be a very good scope in future.

Threats
1. The major threat is from other companies who hold the majority share of consumers in
Indian market i.e. Cadburys and Nestle.

2. There exists no brand loyalty in the chocolate market and consumers frequently shift their
brands.

Challanges faced by SBU (IN AMUL)

Food-processing industry and the food processing business unit (SBU) in Amul is facing
constraints like non-availability of adequate infrastructural facilities, lack of adequate quality
control & testing infrastructure, inefficient supply chain, seasonality of raw material, high
inventory carrying cost, high taxation, high packaging cost, affordability and cultural
preference of fresh food.
Unprocessed foods are prone to spoilage by biochemical processes, microbial attack and
infestation. Good processing techniques, packaging, transportation and storage can play an
important role in reducing spoilage and extending shelf life. The challenge is to retain the
nutritional value, aroma, flavour and texture of foods, and presenting them in near natural
form with added conveniences. Processed foods need to be offered to the consumer in
hygienic and attractive packaging, and at low incremental costs.
Major Challenges are:

 Consumer education on nutritional facts of processed foods

 Low price-elasticity for processed food products
 Need for the distribution network and cold chain
 Backward-forward integration from a farm to consumers
 Development of marketing channels
 Development of linkages between industry, government
 Taxation line with other nation
News articles related to amul

Amul clocks 13% rise in turnover at Rs 33,150 cr in FY'19

GCMMF has registered a provisional turnover of Rs 33,150 crore for 2018-19. The sales
turnover achieved by Amul Federation is 13 per cent higher than the previous financial
year, the company said in a statement.
GCMMF, which markets dairy products under Amul brand, Monday reported 13 per cent

increase in turnover at Rs 33,150 crore during the just ended financial year driven by strong

growth in volume. Gujarat Co-operative Milk Marketing Federation (GCMMF) had posted a

turnover of Rs 29,225 crore in 2017-18.

GCMMF has registered a provisional turnover of Rs 33,150 crore for 2018-19. The sales

turnover achieved by Amul Federation is 13 per cent higher than the previous financial year,

the company said in a statement.

Amul Federation has been achieving a compound annual growth rate (CAGR) of more than

17.5 per cent for the last nine years because of higher milk procurement, continuous

expansion in terms of adding new markets, launching of new products and adding new milk

processing capacities across the country.

The provisional unduplicated group turnover of Amul Federation and its 18 member unions

has crossed Rs 45,000 crore which is also 13 per cent higher than last year.

The 18 member unions of Amul Federation with a farmer-member strength of more than 36

lakh, across 18,700 villages of Gujarat, are procuring on an average 230 lakh litres of milk

per day which is 10 per cent higher than last year.

Amul Federation Chairman Ramsinh P Parmar said, "based on estimated growth in market

demand for Amul products and our future marketing efforts, we anticipate at least 20 per cent

CAGR growth in the business of Amul Federation during the next five years."
Jethabhai Bharwad, Vice Chairman, Amul Federation added that member unions of Amul

plan to enhance its milk processing capacity from the current level of 350 lakh litres per day

to 380–400 lakh litres per day in the next two years.

R S Sodhi, MD, Amul, said, "we have achieved volume sales growth in all product

categories. Pouch milk, which is the highest turnover product, has shown good growth in all

most all the market"

He informed that in all the product categories, it has achieved double digit growth in volume.

2)

Dairy Product Market Insights, Dynamics and Top

Manufacturers 2019-2025: Amul, Nestle, Royal Friesl, Danone,
Unilever
Published: Dec 4, 2019 1:13 a.m. ET

Dec 04, 2019 (Market Insight Reports via COMTEX) -- Comprehensive enlightenment in the
Global Dairy Product Market, addressing growing demand, production volume, sales
revenue, and growth prospects.

The Global Dairy Product Market research report of Services and Software industry
offers an in-depth evaluation of each crucial aspect of the worldwide Dairy Product
industry that relates to market size, share, revenue, demand, sales volume, and
development in the market. The report analyzes the Dairy Product market over the
values, historical pricing structure, and volume trends that make it easy to predict
growth momentum and precisely estimate forthcoming opportunities in the Dairy
Product industry.

Top Companies Are Covered In Dairy Product Market Report:

Amul, Agra Industrier, Dairy Farmers, Kraft Foods, Fonterra, Dairy Farmers of America,
Arla Foods, Meiji Dairies, Nestle, Royal Fries, Campina, Sanncor, Megmilk Snow, Dean
Foods, Parmalat, Danone, Unilever

Dairy Product Market segment by Type, the product can be split into:
Milk
Butter
Cheese
Casein
Ice Cream
Lactose
Yoghurt
Introduction about marginal costing

Topics to be enlightened…

 Introduction
 Meaning and Definition of Marginal Costing
 Pro‐forma of Marginal Costing
 Principles of Marginal Costing
 Features of Marginal Costing
 Advantages of Marginal Costing
 Disadvantages of Marginal Costing
 Contribution
 Process of Marginal Costing
 Fixed and Variable Cost
 Break‐even Point and Break‐even Chart (Utility and Limitations)
 Profit‐Volume Ratio
 Margin of Safety
 Key Factor or Limiting Factor
 Cost Indifference Point
 Cost‐Volume Profit Analysis (CVP Analysis)
 Formula
 Practical Problems

Introduction:

The costs that vary with a decision should only be included in the 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. This is a technique where
only the variable costs are considered while computing the cost of a product.

The perception of marginal cost has been borrowed from economic theory. In
economics, marginal cost is an incremental cost; it is considered as the addition to the
total cost, which results from the production of one more unit of output. According to
the perception of marginal cost, it requires a thorough understanding of various classes
of costs and their relation with the change in the level of activity.

Thus, Marginal Costing is a costing method in which only variable costs are
accumulated and cost per unit is ascertained only on the basis of variable costs. Prime
Costs and Variable Factory Overheads are used to determine the value of stock lying
with the enterprise.

For decision‐making, it is more important to the management for taking further steps
for the improvement of the business. It can be called direct costing, differential costing,
incremental costing and comparative costing.

 Meaning and Definition:

Marginal costing distinguishes between fixed costs and variable costs as conventionally
classified.
The marginal cost of a product –is its variable cost. This normally includes direct
labour, direct material, direct expenses and the variable part of overheads.
According to CIMA Terminology, Marginal Costing is defined as the “Ascertainment
of marginal costs and the effect on profit of changes in
volume or type of output by differentiating between Fixed Costs and Variable Costs.”
Marginal Costing can be formally defined as,
‘The accounting system in which variable costs are charged to cost units
and the fixed costs of the period are written‐off in full against the
aggregate contribution. Its special value is in decision making’.

The theory of marginal costing as set out in a report on Marginal Costing published by
CIMA, London is as follows:
In relation to a given volume of output, additional output can normally be
obtained at less than proportionate cost because with in limits ,the aggregate of certain
 items of cost will tend to remain fixed and only the aggregate of the remainder will
tend to rise proportionately with an increase in output. Conversely, a decrease in the
volume of output will normally be accompanied by less than proportionate fall in the
aggregate cost.
 The theory of marginal costing may, therefore, be understood in the following two
steps:
 If the volume of output increases, the cost per unit in normal circumstances reduces.
Conversely, if an output reduces, the cost per unit increases. If a factory produces
100 units at a total cost ofRs. 5,000 and if by increasing the output by one unit the
cost goes up to Rs. 5,030, the marginal cost of additional output will be Rs. 30.
 If an increase in output is more than one, the total increase in the cost divided by the
total increase in output will give the average marginal cost per unit. If, for example,
the output is increased to 1020 units from 1000 units and the total cost to produce
these units is Rs. 1,045, the average marginal cost per unit is Rs. 2.25.

 The ascertainment of marginal cost is based on the classification and segregation of

cost into fixed and variable cost. In order to understand the marginal costing
technique, it is essential to understand the meaning of marginal cost.

Marginal cost means the cost of the marginal or last unit produced. It is also defined
as the cost of one more or one less unit produced besides existing level of production.
In this connection, a unit may mean a single commodity, a dozen, gross or any other
measure of goods.

For example, if a manufacturing firm produces X unit at a cost of Rs. 500 and X+1
units at a cost of Rs. 540, the cost of an additional unit will be Rs. 40 which is a
marginal cost. Similarly, if the production of X‐1 units comes down to Rs. 460, the cost
of marginal unit will be Rs. 40 (500–460).

The marginal cost varies directly with the volume of production and marginal cost
per unit remains the same. It consists of prime cost, i.e. cost of direct materials, direct
 labor and all variable overheads. It does not contain any element of fixed cost which is
kept separate under the marginal cost technique.

Marginal costing may be defined as the technique of presenting cost data wherein variable
costs and fixed costs are shown separately for managerial decision‐making. It should be clearly
understood that marginal costing is not a method of costing like process costing or job costing.
Rather, it is simply a method or technique of the analysis of cost information for the guidance of
management which tries to find out an effect on profit due to changes in the volume of output.

There are different phrases being used for this technique of costing. In the UK, marginal
costing is a popular phrase whereas in the USA, it is known as direct costing and is used in
place of marginal costing. Variable costing is another name for marginal costing.
Marginal costing technique has given birth to a very useful concept of contribution where
contribution is given by sales revenue less variable cost (marginal cost)
Contribution may be defined as the profit before the recovery of fixed costs. Thus,
contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus
profit (C = F + P).
In case a firm neither makes profit nor suffers loss, contribution will be just equal to
fixed cost (C = F). This is known as break even point.
The concept of contribution is very useful in marginal costing. It has a fixed relation with
sales. The proportion of contribution to sales is known as P/V ratio which remains the same
under given conditions of production and sales.
Applications of marginal costing in decision making
♦ Selection of profitable mix or product mix
♦ Make or buy decision
♦ Diversification of production
♦ Fixation of selling price
♦ Export market vs home market
♦ Alternative method of manufacturing
♦ Maintaining desired level of profit
♦ Profit planning

Principles of Marginal Costing:

The principles of marginal costing are as follows:

For any given period of time, fixed costs will be the same for any volume of sales and
production (provided that the level of activity is within the ‘relevant range’).
Therefore, on selling an extra item of product or service, the following will
happen:
a. Revenue will increase by the sales value of the item sold,
b. Costs will increase by the variable cost per unit,
c. Profit will increase by the amount of contribution earned from the extra
item,
b) Similarly, if the volume of sales falls by one item, the profit will fall by the
amount of contribution earned from the item.
c) Profit measurement should therefore be based on an analysis of total contribution.
Since fixed costs relate to a period of time, and do not change with increases or
decreases in sales volume, it is misleading to charge units of sale with a share of
fixed costs.
d) When a unit of product is made, the extra costs incurred in its manufacturing are
the variable production costs. Fixed costs are unaffected, and no extra fixed costs
are incurred when output is increased.

Features of Marginal Costing:

The main features of marginal costing are as follows:
Cost Classification:
The marginal costing technique makes a sharp distinction between variable costs
and fixed costs. It is the variable cost on the basis of which production and sales
policies are designed by a firm following the marginal costing technique.
 Stock/Inventory Valuation:
Under the marginal costing, inventory/stock for profit measurement is valued at
the marginal cost. It is in sharp contrast to the total unit cost in costing method.

Marginal Contribution:
Marginal costing technique makes use of marginal contribution for marking
various decisions. Marginal contribution is the difference between sales and
marginal cost. It forms the basis for judging the profitability of different products
or departments.
Selling Price Determination:
Selling price of the product in the marginal costing method is determined based
on the cost plus the contribution always. Here, the contribution, of course, means
the difference between the sales and the variable cost.
Profitability:
The profitability of the product/department is based on the contribution made
available by each product/department.
Fixed Costs vs. Period Costs:
Fixed costs are treated as period costs and are charged to the costing Profit and
Loss Account of the period in which they are incurred.

Advantages of Marginal Costing

 Simple Method: Marginal costing is simple to understand. It is calculated only on

the basis of variable costs. By not charging fixed overhead to the cost of production,
the effect of varying charges per unit is avoided.
 Overhead Simplification: In the stock valuation, the marginal costing prevents the
illogical carry‐forward of some proportion of current years fixed overhead to the
next year. It reduces the degree of over or under‐ recovery of overheads due to the
separation of fixed overheads from production cost.
 Effective for Sales and Production Policy: The effects of alternative sales or
production policies can be more readily available and assessed, and decisions taken
would yield the maximum return to the business.
 It eliminates large balances left in overhead control accounts which indicate the
difficulty of ascertaining an accurate overhead recovery rate.
 Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed
overhead, efforts can be concentrated on maintaining a uniform and consistent
marginal cost. To the management, it is useful at various levels.
 It helps in the planning of short‐term profit by breakeven and profitability analysis;
both in terms of quantity and graphs. Comparative profitability and performance
between two or more products and divisions can easily be assessed and brought to
the notice of the management for decision making.

Disadvantages of Marginal Costing:

♦ The separation of costs into fixed and variable is difficult and sometimes gives
misleading results.
♦ Normal costing systems also apply overhead in the situation of normal operating
volume and this shows that no advantage is gained by the marginal costing.
♦ In the marginal costing, stocks and work‐in‐progress are understated. The exclusion
of fixed costs from inventories affects the profit, and true and fair view of financial
affairs of an organization may not be clearly visible.
♦ Volume variance in the standard costing also discloses the effect of fluctuating
output on fixed overhead. The marginal cost data becomes unrealistic in case of
highly fluctuating levels of production, e.g., in case of seasonal factories Application
of fixed overhead depends on estimates and not on the actual and as such there may
be under or over absorption of the same

♦ Control affected by means of the budgetary control is also accepted by many. In

order to know the net profit, one should not be satisfied with the contribution and
hence, fixed overhead is also a valuable item. A system which ignores fixed costs is
 less effective, for a major portion fixed cost is not taken care of in the marginal
costing.
♦ In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the
assumptions underlying the theory of marginal costing sometimes becomes
unrealistic. For the long term profit planning, absorption costing is the only answer.

MARGINAL COSTING PRO‐FORMA

Particulars Rs. Rs.

Sales Revenue Xxxxx
Less: Marginal Cost of
Sales
Opening Stock (Valued @ xxxx
marginal cost)
Add: Production Cost xxxx
(Valued @ marginal cost)
Total Production Cost xxxx
Less: Closing Stock (Valued (xxx)
@ marginal cost)
Marginal Cost of Production xxxx
Add: Selling, Admin & xxxx
Distribution Cost
Marginal Cost of Sales (xxxx)
Contribution Xxxxx
Less: Fixed Cost (xxxx)
Marginal Costing Profit Xxxxx

 Contribution:

The term ‘contribution’ mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. The analysis of marginal costing depends
a lot on the idea of contribution. In this technique, the efforts are directed only to the
 increase of the total contribution. Contribution is a term which defines the surplus that
remains after variable cost of sales is deducted from sales revenue as indicated below:

 MARGINAL COST = VARIABLE COST

DIRECT LABOUR
+
DIRECT MATERIAL
+ DIRECT
EXPENSE
+
VARIABLE OVERHEADS
CONTRIBUTION = SALES ‐ MARGINAL
COST

The term marginal cost sometimes refers to the marginal cost per unit and sometimes
to the total marginal costs of a department or batch or operation. The meaning is usually
clear from the context.
A product whose selling price exceeds its variable cost is said to have:
1.Covering its variable cost and
2.Making a contribution,
3.towards the firm’s fixed cost and after these have been covered;
4.towards the firm’s profit.
In normal circumstances, the selling price of the product contains some element of
profit, but there may be some exceptional or adverse circumstances, when the products
may have to be sold on cost to cost basis or even at loss. Therefore, the character of
contributions will have the following composition under different circumstances:

 Selling Price containing Profit:

Contribution = Fixed Cost + Profit
 Selling Price at Cost:
Contribution = Fixed Cost
 Selling Price at Loss: Contribution
= Fixed Cost- Loss
 It becomes easy to determine the missing one if any three of these four items is known
to us. In the break‐even analysis, some of the specific uses of contribution are:
1.Break‐even point determination;
2.Profitability of products assessment;
3.Different department’s selling price determination;
4.The optimum sales mix determination

 Process of Marginal Costing:

Marginal costing requires the calculation of the difference between sales and marginal
cost of sales. This difference is known as the contribution which provides both the
fixed cost and the profit. Excess of contribution over the fixed cost is known as the net
margin or profit. Here emphasis remains on increasing the total contribution.

 Variable Cost:

Variable is that part of total cost which in proportion with volume changes directly.
With the change in volume of output, total variable cost changes. Increase in the total
variable cost results from an increase in the output and reduction in the total variable
cost results from a decrease in the output. However, irrespective of increase or decrease
in volume of production, there will be no change in variable cost per unit of output.
Costs of direct material, direct labour, direct expenses, etc. are included in variable
cost. By dividing the total variable cost by the units produced, variable cost per unit is
sought. The variable cost per unit is also referred to as the variable cost ratio. By
dividing the change in cost by the change in activity, the variable cost can be obtained.
Variable costs are very sensitive in nature and a variety of factors can influence
the same. Helping the management in controlling the variable cost is the main aim of
‘marginal costing’ because this is the area of cost which itself needs control by the
management.
 Fixed Cost:

Cost which is incurred for a period and which tends to remain unaffected by
fluctuations in the level of activity, output or turnover, within certain output and
turnover limits. Examples are rent, rates, salaries of executive and insurance, etc.

Break‐Even Point (BEP):

The break‐even point is the level of activity or sales at which a company makes neither
profit nor loss. Sales revenue exactly equals total costs at this level. Thus, the sales
volume at which operations break‐even is indicated by the break‐even point. In terms
of number of units sold or in terms of sales value, it can be expressed.
Sales – Variable cost = Fixed cost + Profit
Since at the break‐even point, profit is nil, it follows that:
Sales at the break‐even point – Variable cost = Fixed cost
Thus, at the break‐even point, contribution is just enough to provide for the fixed cost.
Thus, enough contribution is necessary to be earned to cover fixed costs before any
profit can be earned. If the level of actual sales is above the break‐even point, profit
will be earned by the company. On the other hand, if actual sales are below the break‐
even point, loss will be incurred by the company.
By any of the following formula, the break‐even point (BEP) can be calculated:

 (a) BEP (in terms of units) = Fixed Cost

Contribution per unit
 (b) B/E (in terms of sales value) = Fixed Cost × Sales
Contribution
Or Fixed Cost
P/V Ratio

When graphical presentation of cost‐volume‐profit relationship is made, the break‐even

point will be the point at which the total cost line and total sales line intersect each
other.
 The break‐even point is crucial for the management in that it can the show lowest level
to which the given activity can drop down without actually jeopardizing the life of the
firm. Occasionally, operating below the break‐even point may not be necessarily fatal
for a concern, however, it must operate above this level in the long run.

By comparing the actual activity level with BEP, one can ascertain whether or not the
company is making any profit.
Activity Level B.E.P. Situation
> Profit
= No Profit – No
Loss
Loss

Profit‐Volume Ratio:

Profit Volume Ratio means contribution for every Rs. 100 Sales Value. It is always
calculated on the percentage basis or at times it is compared with the Sales Value.

When the contribution from sales is expressed as a sales value percentage, it is known
as profit‐volume ratio (or P/V ratio). The relationship between the contribution and the
sales is expressed by it. Sound ‘financial health’ of a company’s product is indicated by
better P/V ratio. The change in the profit due to the change in volume is reflected by
this ratio. If expressed on equal footing with the sales, it will show how large the
contribution will appear. If size of the sales is Rs.100, then the P/V Ratio of 60% will
mean that the contribution is Rs. 60

One important characteristic of P/V ratio is that at all levels of output it remains
constant because at various levels the variable cost as a proportion of the sales remains
constant. When P/V ratio is considered in conjunction with the margin of safety, it
becomes particularly useful. P/V ratio can be referred to by other terms such as: (a)
marginal income ratio, (b) contribution to sales ratio, and (c) variable profit ratio.
P/V ratio may be expressed as:
 P/V ratio= Contribution / Sales
 Sales – Variable cost
Sales
1 ‐ Variable cost
Sales
 Or, P/V ratio = Fixed Cost + Profit
Sales
 Or, P/V Ratio = Difference in Profits/Difference in
Sales × 100

It is also possible to express the ratio in terms of percentage by multiplying by 100

Thus a relationship between the contribution and the sales is established by the
profit/volume ratio. Hence, it might be better to call it a Contribution/Sales ratio (or C/S
ratio), though the term Profit/Volume ratio (P/V ratio) is now widely used.

In addition to the above, it is possible to compute the ratio by comparing the change
in the contribution with the change in the sales or the change in the profit with the
change in the sales. it is possible to compute the ratio. Because it is assumed that the
fixed cost will remain the same at different levels of output, an increase in the
contribution will mean an increase in the profit.

 P/V ratio = Change in contribution

Change in Sales

Margin of Safety:

Margin of safety means the difference between the total sales and the sales at the BEP.
It is also known as the amount of the sales above the Break Even Sales. Margin of
safety can be expressed in absolute terms and also in terms of percentage. The higher
the margin of safety, the better the situation for an organization. A high margin of
safety provides strength and stability to a concern.
 To increase the margin of safety, the company should endeavour to keep its BEP at its
lowest level and should try to maintain actual sales at the highest level. This may be
possible either by controlling fixed costs; by resorting to a dynamic sales policy, or by
reducing variable costs. Reproducing the profitable products after discontinuing the
unprofitable ones, can also help increase the margin of safety.
Margin of Safety in terms of units as well as Rupees will be found as under;

 M.O.S. (Units) = Sales (Units) – B.E.P. (Units)

 M.O.S. (Rs.) = Sales (Rs.) – B.E.P. (Rs.)

Key Factor or Limiting Factor:

There are always factors which, for the purpose of managerial control, do not lend
themselves. For example, there are legal restrictions on the import of a material for
some specific time and that the material is the chief element for the company's product,
then the company cannot carry out its production as much as it wants. Production has
to be planned after taking into consideration this limiting factor. However, its efforts
will be directed towards the maximum utilization of available sources. Thus, limiting
factor is a factor, by which, at a given point of time, the volume of output of an
organization gets influenced.

The key factor is the factor whose influence, for the purpose of ensuring the maximum
utilization of resources, must be ascertained first. Profit can be maximized by gearing
up the process of production in the light of influences of the key factors. Managerial
action is constrained and the output of the company is limited by the key factor.
Although sale is the usual limiting factor, any of the following factors could also be a
limiting factor:
(a) Material
(b) Labour
(c) Power
(d) Capacity of the plant
(e) Actions of the government
 When a decision has to be taken as regards the relative profitability of different
products and a key factor in operation, the contribution for each product is divided by
the key factors.

As regards products or projects, the choice rests with the management as to how will it
secure more contribution of the key factors per unit. Thus, if the key factor is sales,
then consideration should be given to the contribution to the sales ratio. If labour
shortage is faced by the management, then consideration should be given to the
contribution per labour hour. Suppose sales of product X & Y are Rs. 200 & Rs. 220
and the variable cost of sales are Rs. 60 and Rs. 46. The labour hours (key factor)
required for these products are 4 hours and 6 hours respectively. The contribution will
be: Product X, 200 ‐ 60 = Rs.140/unit or Rs.35/ hour; Product Y, 220 ‐ 46 =
Rs.174/unit or Rs.29/hour. In this case, P/V ratio of product Y (79%) is better than P/V
ratio of product X (70%) and producing product Y will be the normal conclusion. Here,
the key factor is time. Contribution per hour is better in product X than in product Y.
Thereby, the product X is more profitable than the product Y during labour shortage.

Cost Indifference Point:

It is the point at which the total costs for two alternatives are the same. In other words,
it is the point at which the total cost lines under two alternatives intersect each other.
The Cost Indifference Point is calculated as under:

Difference in Fixed Costs/Difference in variable cost per unit Cost Indifference Point is
used to choose between two alternative processes for achieving the same objective. The
choice depends on the estimated activity level.
The decision regarding the choice of process based on the Cost Indifference
Point is considered as follows:
Activity Level Indifference Point Product should be
manufactured by
a process having
> Lesser variable
 Cost & Higher
Fixed Cost
= Indifferent
< Lesser Fixed Cost
& Higher Variable
Cost

Cost‐Volume‐Profit Analysis (CVP Analysis):

Cost‐Volume‐Profit Analysis is the analysis of three variables viz. Cost, Volume and
Profit, which explores the relationship existing amongst Costs, Revenue, Activity
Levels and the resulting Profit.
There exists a very close relation among cost, volume and profit. As a simple fact, one
knows that if the volume increases, the cost per unit will decrease and the profit per
unit will increase. Thus, one can conclude that there is a direct relation between volume
and profit but there exists an inverse relation between the volume and cost. This
analysis of CVP may be applied for profit planning, cost control, evaluation of
performance and decision making.
The main objectives of such analysis are:
 The CVP Analysis helps to forecast profit with more accuracy as it is essential to
know the relation between profits and costs on the one hand and volume on the
other.
 As one knows that the sales and the variable costs tend to vary with the variance
in the volume of output, it is necessary for the business concern to budget the
volume first for establishing budgets for sales and variable costs. This is where
CVP analysis becomes useful as it helps in setting up Flexible Budgets which
indicate cost at various levels of activity.
 The CVP analysis also helps in evaluating the performance for the purpose of
control in the post implementation stage in a business plan. It is very necessary to
evaluate the effects of changes in volume on costs in order to review whatever
results are achieved and the costs incurred.
 It is common knowledge that pricing plays a vital role in fixing up the volumes
especially in a period of recession. So, the CVP analysis is also helpful in
 deciding the price policies as it shows the effect of different price structures on
costs and profits.
 As the predetermined overhead rates are related to a selected volume of
production, study of Cost‐Volume relation is necessary in order to know the
amount of the overhead costs which could be charged to product costs at various
levels of operation.
However, in order to get the maximum results out of the CVP analysis, it is pivotal to
understand the assumptions based on which the CVP analysis is based. The CVP
analysis provides useful results only when certain assumptions are made, such as:
 Fixed Costs do not change.
 Profits are calculated on the variable costs basis.
 All variables per unit remain constant.
 There is a single product or a constant sales mix in case of multiple products.
 Costs can be accurately divided into fixed and variable components.
 The analysis apples only to short‐term horizon.
 The analysis applies to a relevant range only.
 Total costs and total revenues are linear functions of output.

 Formulas:

 Contribution:
Contribution = Sales – Variable Cost

 P/V Ratio:
P/V Ratio = Contribution/Sales × 100

 Profit/Loss:

Sales Xx
Variable cost (xx)
Contribution Xxx
Fixed cost (xxx)
Profit/(Loss) xxxx/(xxxx)
  Break‐Even Point:
B.E.P. (Volume) = Fixed Cost/Contribution Per Unit
B.E.P. (Value) = Fixed Cost/P/V Ratio

 Margin of Safety:
Margin of Safety (Volume) = Sales (Units) – B.E.P. (Units)
Margin of Safety (Value) = Sales (Rs.) – B.E.P. (Rs.)
 Total Cost = Variable Cost + Fixed Cost
 Variable Cost = Variable Cost Per Unit × Units

 Indifference Production Level =

Difference between fixed cost/difference between variable cost per unit-

Activity level Indifference point Product should be

manufactured by
machinary having
> Less variable cost
and higher fixed cost
= Indifference point
< Lesser fixed cost and
higher variable cost

sales Breakeven point profit/loss

> profit
= No profit/loss
< loss

 Shut Down Point:

Shut Down Point (Sales) = Avoidable Fixed Cost/P/V Ratio
Avoidable Fixed Cost = Total Fixed Cost – Fixed Cost if operation is shut down

 Profit/(Loss) = Margin of Safety (Value) × P/V Ratio

 Profit/(Loss) = Margin of Safety (Volume) × Contribution Per Unit

 Contribution Per Unit = Difference in Profit/Difference in Sales Units

  P/V Ratio = Difference in Profit/Difference in Sales × 100

 Objectives of project-
♦ To study the application of marginal costing
♦ To study different decisions based on marginal costing
♦ To study marginal costing techniques applied in industries
♦ To gain knowledge about principles of marginal costing
♦ To determine condition for cost control and analysis
♦ To examine how prodct decision are made by management under these
techniques

 Review of literature-

1.Dr J Mukharjee(2010) submitted the research paper on application on marginal

costing technique in a manufacturing company this research work examine importance
of application of marginal costing technique in a manufacturing company using nestle
nigera pc as a case study it shows application of marginal costing tecnique is survival
tool in nigera present economic situation in carrying out these work primary and
secondary data were used the primary source of data was through questionnare the
secondary mehod was also used to collect information for these study these reserch
study reveled that application of marginal costing is necessary tool for organision
overall peromance.

2.Dr Mayuresh Singhania(2011) evluated and apprised the effectiveness and

efficiency of marginal costng appliton as a tool to decison making in manufacturing
copany with anbara moor manufacturing company emere as case study for finding of
study it is recommended to the management that company budgetry control technique
should be supported with standard costing in control of material and labour cost.
3.Project Report submitted by mr odiyar sumrang of NES ratnam college (2017)-

State about technique of costing I.e how marginal costing techniques can be used in
industry the purpose of these study was to prove that marginal costing as management
accounting tool the study revels about basic decision making indicator in marginal
costing the research project concluded that the cost vary with decision should only be
included in decision analysis

4.Mrs Priyanka Gaonkar(2005) submitted research project on marginal costing in

Delhi university her research paper was related about importance of marginal costing in
decision making according to research conducted by her marginal costing is not distinct
method of ascertainment of cost but technique which applies existing method in
particular manner so that the relationship between profit and the volume of output can
be clearly bought out the research concluded that marginal costing depends not only
upon timing of populated change in output but also timing of decision adapt to it.

5.Mrs shalini gowda(2008) carried research work on marginal costing techniues used
in industry the research work was based on her internship in nadini hi tech product
plant her research work mainly focus on cost volume and profit analysis of the
company the company cost control will influence more in level of cost management of
company and also it revels importance of BEP analysis in decision making of company.

6.Anjali Modi (2015) carried the research project on managerial costing based on amul
company the project mainly concentrate on how amul company utilized its limited
resources to earn higher profit and how marginal costing technique affects the profit of
amul these study reveled that with help of marginal costing the amul company is
capable to expand and diversify over period of time.

7.Ajay Patil(2015) submitted project report on application of marginal costing

technique and its limitation for M.PHILL degree these report work mainly focus on
techniques of marginal costing used in industry and cover its component
advantage,disadvatage and limitation. These research work concluded that marginal
costing helps to make decision

8.vivek shriram mahajan(2015) submitted project report on marginal costing

technique for M.PHILL degree these project cover all areas of industries in which
marginal costing technique can be used these reserch work mainly focus on how
company earn max profit by adopting marginal costing technique industries and
usefullness of marginal costing and these research work mainly explain about proper
allocation of fixed cost for earning maximum contribution.

9. Arun jaiswal (2014) conducted research work on marginal costing as an essential

tool for decision making these research work is based on case study ANAMNCO
ENUUGU these research work mainly concentrate on the uses of marginal costing that
is decision making , controlling of the cost,fixing of the price this research work mainly
reveal that how ANAMNCO company earn profit by using marginal costing
techniques.

10.S Siva,Mosses joshuva deriel,S Shalini Assistant professor of Acharya school of

business techonology puduchery(2013) conducted research work on a A STUDY OF
MARGINAL COSTING IN GODREJ CONSUMER PRODUCT LTD based on case
study of godrej ltd the purpose of these study was to prove that when production
quantity increases assets value also increases it concluded that it is method of analysis
of management which tries to find out an effect on profit due to change in volume of
output.

11.Elizabath eappel,Neetha theresa jacob,Swarupa shau (2015) submitted research

project about marginal costing techniques used in industries based on case study of
dabur company they also analyzed cost sheet of dabur company they also measured the
profitability of dabur company on the basis of cost techniques applied by them.the
reserch work also covers various cost based decision taken by dabur company
12.L.N Chopde(2013) submitted research project based on application of marginal
costing in managerial decision making based on case study of roshan textiles the project
explained the concept of process with examples the project mainly concentrate on
concept of marginal costing including contrubution,profit and break even analysis it
concluded that impact of marginal costing on managerial decision making is
indefensible they they also suggest many ways to reduce marginal costing.

13.Shanti jha(2015) submitted reserch project for her BBA degree to university of
delhi based on application of marginal costing in decision making the project outlines
many applications of marginal costing such as fixation of selling price,continue or shut
down operation in trade deficit,making or buying components etc.and also project
suggest about how management of oranisation rely on techinques of marginal costing in
day to day decision making.the project covers various aspect of marginal costing.