MA CHAPTER 4 Marginal Costing 2

Management Accounting
BBA III SEMESTER

By Asim Kumar
Sahore
The sports material manufacturing company
budgeted the following data for the coming year.
From the following data calculate:

(a) P/V Ratio (b) Variable Cost and
(c) Profit
Rs.
Sales 80000
Fixed expenses 15000
Break even point 50000
Marginal Cost Statement
Total (Rs.)
Sales 80,000
Less: Variable
Cost
Contribution
Less: Fixed cost 15,000
Profit / loss
B.E.P
= Fixed cost / PV RATIO
50,000 = 15,000/PV
RATIO
PV RATIO = 30 %
P/V Ratio =
(Total Contribution / Total Sales) x
100
30 % = (Total Contribution /
80,000 ) x 100
Total Contribution =Rs. 24,000
Total (Rs.)
Sales 80,000
Less: Variable 56,000
Cost
Contribution 24,000
Profit / loss 9,000
From the following data, calculate the
break-even point of sales in rupees:
Selling price Rs.20
Variable cost per unit:
Manufacturing Rs.10
Selling Rs.5
Overhead (fixed):
Factory overheads Rs.500000
Selling overheads Rs.200000
Per unit (Rs.) Total (Rs.)
Sales
Less: Variable
Cost
Contribution
Less: Fixed cost
Profit / loss
Sales 20
Less: Variable 15
Cost
Contribution 5
Less: Fixed cost 7,00,000
Profit / loss
P/V Ratio =
(Contribution per unit / Sales per
unit ) x 100
= (5/20) x 100
= 25 %
B.E.P (units)
= Fixed cost /
contribution per unit
= 700,000/5
=1,40,000 units
B.E.P sales (Rs.)
= Fixed cost / PV ratio
= 700,000 / 25 %
=Rs. 28,00,000
Sales (140,000) 20 28,00,000
Less: Variable 15 21,00,000
Cost
Contribution 5 7,00,000
Profit / loss Nil
The following data have been
obtained from the records of a
company
I Year II Year
Rs. Rs.
Sales 160000 180000
Profit 20000 28000
Calculate the break-even point.
When profits and sales for two
consecutive periods are given,
the following formula can be
applied:
Change in Profit X 100
Change in Sales
Change in Profit X 100
Change in Sales
= 8,000 X 100
20,000
= 40 %
Total (Rs.)
Sales 1,60,000
Cost
Contribution 64,000
Profit / loss 20,000
B.E.P sales (Rs.)
= 44,000 / 40%
=Rs. 1,10,000
Total (Rs.)
Sales 1,10,000
Less: Variable
Cost
Contribution
Less: Fixed cost
Profit / loss
Total (Rs.)
Sales 1,10,000
Cost
Contribution 44,000
Profit / loss Nil
From the following information,
calculate
a. Break-even point
b. Number of units that must be sold to
earn a profit of Rs.60000 per year.
c. Number of units that must be sold to
earn a net income of 10% on sales
Sales Price-Rs.20 per unit
Variable cost-Rs.14 per unit
Fixed cost-Rs.79200
Sales 20
Less: Variable 14
Cost
Contribution 6
Profit / loss
P/V Ratio =
unit) x
100
= 6/20 X 100
= 30 %
B.E.P (units)
= Fixed cost /
= 79,200/6
=13,200 units
B.E.P sales (Rs.)
= 79,200 / 30%
=Rs. 2,64,000
Sales (13,200 units) 20
Less: Variable 14
Cost
Contribution 6
Profit / loss
Sales (13,200 units) 20 2,64,000
Cost
Contribution 6 79,200
Profit / loss Nil
Profit goal:
To earn a desired amount of profit
i.e., a profit goal can be reached by
the formula given below
Sales volume to reach profit goal =
Fixed cost + Desired profitability
P/V ratio
Profit goal (in units)
= Fixed cost + Desired profitability
79,200 + 60,000 =
6
= 23,200 units
Profit goal:
79,200 + 60,000 =
30 %
= Rs. 4,64,000
Sales (23,200 units) 20 4,64,000
Less: Variable 14
Cost
Contribution 6
Profit / loss
Sales (23,200 units) 20 4,64,000
Cost
(c) Number of units to be sold to
make a net income of 10% on sales
(c) Number of units to be sold to
make a net income of 10% on
sales
If `x’ is number of units:

SALES=VARIABLE COST+FIXED
COST+PROFIT
20x = Fixed Cost + Variable
Cost + Profit
20x = 79200 + 14x + 2x

20x – 16x = 79200
x=79200 / 4 = 19800 units
Sales (19,800 units) 20
Less: Variable 14
Cost
Contribution 6
Profit / loss
Sales (19,800 units) 20 3,96,000
Cost
You are given the following
data for the year 2020 for a
factory.
Output: 40000 units
Fixed expenses: Rs.200000
Variable cost per unit: Rs.10
Selling price per unit: Rs.20
How many units must be produced
and sold in the year 2021, if it is
anticipated that selling price would
be reduced by 10%, variable cost
would be Rs.12 per unit, and fixed
cost will increase by 10%? The
factory would like to make a profit in
2021 equal to that of the profit in
2020.
Sales
Less: Variable
Cost
Contribution
Less: Fixed cost
Profit / loss
P/V Ratio =
unit) x
100
= 50 %
Sales (40,000 20 800,000
units)
Cost
Sales 18
Less: Variable 12
Cost
Contribution 6
Profit / loss
P/V Ratio =
unit) x
100
= 33.33 %
Profit goal:
Fixed cost + Desired profitability
Contribution ratio
Profit goal:
220,000 + 200,000 =
33.33 %
= Rs. 12,60,000
Sales (70,000 18 12,60,000
units)
Cost
Que. Raviraj Ltd. Manufactures and
sells four types of products under the
brand names of A, B, C and D. The
sales mix in value comprises 33 1/3%,
41 2/3%, 16 2/3% and 8 1/3% of
products A, B, C and D respectively.
The total budgeted sales (100%) are
Rs. 60,000 per month.
Operating costs are
Variable cost:
Product A 60% of selling price
B 68% of selling price
C 80% of selling price
D 40% of selling price
Fixed cost: Rs. 14,700 per month
Calculate the break even point for the products
on an overall basis and also the B.E. Sales of
individual products. Show the proof for your
answer.
Solution:
P/V Ratio for individual products =

100-% of variable cost to sales
A = 40 %( 100-60)
B = 32 %( 100-68)
C = 20 %( 100-80)
D = 60 %( 100-40)
A B C D Total
SALES 20000 25000 10000 5000 60000
-V COST 12000 17000 8000 2000 39000
Contrib 8000 8000 2000 3000 21000
ution
P/V Ratio =
(Contribution / Sales) x 100
= (21,000 / 60,000) x 100

= 35 %
B.E.P sales (Rs.)
= 14,700 / 35 %
=Rs. 42,000
A B C D Total
SALES 20000 25000 10000 5000 60000
% to total
sales
33 1/3% 41 2/3% 16 2/3% 8 1/3%
PV 40 % 32 % 20 % 60 %
ratio
Contribution
5600 5600 1400 2100 14700
-Fixed 14700
cost
Profit Nil
Decision to Make or Buy
An automobile manufacturing company
finds that the cost of making Part No.
208 in its own workshop is Rs. 6. The
same part is available in the market at
Rs.5.60 with an assurance of continuous
supply. The cost data to make the part
are:
Material Rs.2.00
Direct labour Rs.2.50
Other variable cost Rs.0.50
Fixed cost allocated Rs.1.00
Rs.6.00
Should be part be made or brought?
Will your answer be different if the market
price is Rs.4.60? Show your calculations
clearly.
To take a decision on whether to „make or
buy‟ the part, fixed cost being irrelevant is to
be ignored. The additional costs being
variable costs are to be considered.
To take a decision on whether to „make or
buy‟ the part, fixed cost being irrelevant is to
be ignored. The additional costs being
variable costs are to be considered.
Materials Rs.2.00
Direct labour Rs.2.50
Other variable cost Rs.0.50
---------
Total variable cost Rs.5.00
----------
The company should continue
„to Make‟ the part if its
market price is Rs.5.60
„Making‟ results in saving of
Rs.0.60 (5.60 – 5.00) per unit.
(b)The company should „Buy‟ the part
from the market and stop its production
facilities which become „Idle‟ if the
production of the part is discontinued
cannot be used to derive some income.
Note: The above conclusion is on the
assumption that the production facilities
which become „Idle‟ if the production of
the part is discontinued cannot be used
to derive some income.
Key Factor
sometimes the firm may not be
able to sell all the products it
manufactured but production
may be limited due to shortage
of materials, labour, plant,
capacity, capital, demand, etc.
A key factor is also called as a
limiting factor or principal budget
factor or scarce factor. It is factor of
production which is scarce and
because of want of which the
production may stop. Generally
sales volume, plant capacity,
material, labour etc may be limiting
factors.
When there is a key factor profit is
calculated by using the formula:
When there is no limiting factor,
the production can be on the basis
of the highest P / V ratio. When
two or more limiting factors are in
operation, they will be seriously
considered to determine the
profitability.
Profitability = Contribution
Key factor
(Materials, Labour, or Capital)
Q. The following particulars are extracted from the
records of a company.
Product A Product B
Sales (per unit) Rs.100 Rs.120
Consumption of material 2 Kg. 3 Kg.
Material cost Rs.10 Rs.15
Direct wages cost 15 10
Direct expenses 5 6
Machine hours used 3 2
Overhead expenses :
Fixed 5 10
Variable 15 20
Direct wages per hour is Rs.5. Comment
on the profitability of each product
(both use the same raw materials) when:
(i) Total sales potential in units is limited.
(ii) Production capacity (in terms of
machine hours) is the limiting factor.
(iii)Material is in short supply.
(iv) Sales potential in value is limited.
The Statement Showing Computation of Profits
Product A Product B
per unit per unit
Selling price (per unit) Rs.100 Rs.120
Less: Variable cost
Contribution per unit

The Statement Showing Computation of Profits
Product A Product B
per unit per unit
Less: Variable cost
Direct expenses 5 6
Variable Overhead 15 20
Contribution per unit 55 69
Comments on the profitability of
products ‘A’ and ‘B’ on the basis of
different key-factors
(i) When total sales potential in
units is limited,
Comments on the profitability of
products ‘A’ and ‘B’ on the basis of
different key-factors
(i) When total sales potential in
units is limited, product „B‟ will be
more profitable compared to „A‟
as its „Contribution per unit is
more by Rs.14 (69 – 55).
(ii) When production capacity in
terms of machine hours is the
limiting factor,
Product A Product B
per unit per unit
Less: Variable cost
Direct expenses 5 6
Contribution per 55/3 69/2
machine hour =18.33 =34.50
(ii) When production capacity in
terms of machine hours is the
limiting factor, product „B‟ is more
profitable as its „contribution per
hour‟ is more by Rs.16.17 (34.5 –
18.33)
(iii) When raw material is in short
supply product
Product A Product B
per unit per unit
Less: Variable cost
Direct expenses 5 6
Contribution per kg. of 55/2 69/3
material =27.50 =23
(iii) When raw material is in short
supply product „A‟ is more
profitable as its „contribution per
kg‟ is higher by Rs.4.5 (27.5 – 23)
(iv) When sales potential in value is
the limiting factor
Product A Product B
per unit per unit
Less: Variable cost
Direct expenses 5 6
P/V Ratio 55 % 57.50 %
(iv) When sales potential in value is
the limiting factor product „B‟ is
better as its P/V Ratio is higher
than that of product „A‟.
Note: Contribution per unit can be
divided with any given „Key Factor‟
or „Limiting factor‟ to obtain „Key-
factor contribution‟ (K.F.C.). The
Product which gives higher
contribution in terms of key-factor
is decided to be better and more
profitable
Break-even analysis is the form of
CVP analysis.
It indicates the level of sales at
which revenues equal costs. This
equilibrium point is called the
break even point. It is the level of
activity where total revenue
equals total cost. It is alternatively
called as CVP analysis also.
But it is said that the study up
to the state of equilibrium is
called as break even analysis
and beyond that point we
term it as CVP analysis.
Cost – Volume Profit analysis
helps the management in
profit planning. Profits are
affected by several internal
and external factors which
influence sales revenues and
costs.
Break Even Chart
These depict the interplay of three
elements viz., cost, volume, and
profits. The charts are graphs which
at a glance provide information of
fixed costs, variable costs, production
/ sales achieved profits etc., and also
the trends in each one of them. The
conventional graph is as follows:
Draw up a profit – volume of
the following:
Sales Rs. 4 Lakhs
Variable cost Rs. 2 Lakhs
Fixed cost Rs. 1 Lakhs
Profit Rs. 1 Lakhs
Sales 4,00,000
Less: Variable 2,00,000
Cost
Contribution 2,00,000
Profit / loss 1,00,000
P/V Ratio =
(Total Contribution / Total Sales) x
100
= (2,00,000 / 4,00,000) x 100
= 50%
B.E.P sales (Rs.)
= 1,00,000 / 50%
=Rs. 2,00,000
Sales 4,00,000
Variable Cost 2,00,000
Fixed cost 1,00,000
Total cost 3,00,000
Sales
Total
cost
Cost &
Revenue
Fixed
cost
Volume

MA CHAPTER 4 Marginal Costing 2

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MA CHAPTER 4 Marginal Costing 2

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Management Accounting

BBA III SEMESTER

From the following data calculate:

If `x’ is number of units:

20x = 79200 + 14x + 2x

P/V Ratio for individual products =

= (21,000 / 60,000) x 100

Contribution per unit

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