Marginal Costing

Variable Cost xxx

Fixed Cost xxx

+
Total Cost xxxx

Variable Cost: The cost which varies with production is called variable cost. Ex: Direct material, direct labour

Fixed Cost: The cost which remains fixed even if production increases or decreases. Ex: Factory rent, Production
manager’s salary etc.

Break Even Point:

Loss BEP Profit

No Profit No Loss

Cost of Production = 10,000 for 100 items

Selling Price per unit = 200

BEP = 10000/200 = 50 units

At least 50 units to be sold to achieve Break even point of no profit, no loss.

Marginal cost statement:

Sales (S) = 100

– Variable Cost (V) = 40
_______________ ______
Contribution (C) = 60
– Fixed Cost (F) = 20
_______________ ______
Profit/Loss (P/L) = 40

Formulae:
Profit Volume Ratio (PV Ratio)

1. P. V. Ratio = (S-V) / S *100

= C / S *100

2. BEP (In Rupees) = F / (PV Ratio)

BEP (in units) = Fixed Cost / Contribution per unit

3. Contribution = Sales – Variable

= Sales X PV Ratio

= (Fixed Cost + Profit) or (Fixed Cost - Loss)

4. Margin of Safety = Present Sales – BEP Sales

5. Sales required to earn a desired profit = (Fixed Cost + Desired Profit) / PV Ratio
Problem:

Selling Price Per unit = Rs. 50

Variable Cost per unit = Rs. 30
Fixed Cost = Rs. 60,000

Calculate:
1. Contribution
2. PV ratio
3. BEP
4. Sales to earn a Profit of Rs 40,000

1. Contribution = S–V = 50 – 30
= Rs 20

2. PV Ratio = C / S * 100 = 20/50 *100

= 40%

3. BEP = F / PV Ratio = 60,000 / 40%

= Rs. 1,50,000

BEP in units = F / C per unit

= 60,000 / 20
= 3000 units

4. Sales to earn a Profit of Rs 40,000 = (F + Desired Profit) / PV Ratio

= (60,000 + 40,000) / 40 %
= Rs. 2,50,000

Problem:

Sales = Rs 10,00,000
Variable Cost = 40% of Sales
Fixed Cost = Rs 2,50,000
Calculate,

1. PV ratio
2. BEP
3. Margin of Safety
4. Sales required to earn a profit of Rs 5,00,000

1. PV Ratio = (S-V) / S *100

= 60%

2. BEP = F / PV ratio = 2,50,000 / 60%

= 4,16,667

3. Margin of Safety = Present Sales – BEP Sales

= 10,00,000 - 4,16,667
= 5,83,333

4. Sales required to earn a profit of Rs 5,00,000 = (F + Desired Profit) / PV Ratio

= (2,50,000 + 5,00,000) / 60%
= 12,50,000
Problem:

The following are the estimates for the year ending 2021, related to the manufacturing concern.
Sales Unit = 25,000 units
Fixed Cost = Rs. 1,20,000
Sales value = Rs 4,00,000
Variable Cost = Rs 8 per unit

You are required to,

Find PV ratio, BEP and Margin of Safety
Calculate revised PV ratio, BEP and Margin of Safety in each of the following cases
a. Increase of 10% in variable cost
b. Decrease of 10% in selling price
c. Increase of Sales volume by 5000 units
d. Increase in fixed cost by 15,000

Solution:

Sales Unit = 25,000 unit

Fixed Cost = Rs. 1,20,000
Sales value = Rs 4,00,000
Variable Cost = Rs 8 per unit
Selling Price = Rs 16 per unit
Contribution = Rs 8 per unit

1. PV Ratio = C / S * 100
= 8/16 *100
= 50%

2. BEP = F / PV ratio = 1,20,000 / 50%

= 2,40,000

3. Margin of Safety = Present Sales – BEP Sales

= 4,00,000 - 2,40,000
= 1,60,000

Particulars PV Ratio (C / S * 100) BEP (F / PV ratio) Margin of Safety (Present

Sales – BEP Sales)
Actual Values 8/16 *100 = 50% 1,20,000 / 50% 4,00,000 - 2,40,000
= 2,40,000 = 1,60,000
Sales Unit = 25,000 units
Fixed Cost = Rs. 1,20,000
Sales value = Rs 4,00,000
Variable Cost = Rs 8 per unit
Selling Price = Rs 16 per unit
Contribution = Rs 8 per unit

Increase of 10% in variable 7.2 / 16 * 100 = 45% 1,20,000 / 45% = 2,66,667 4,00,000 - 2,66,667
cost = 1,33,333

V = 8 + (10% of 8) = 8.80
C = 16 – 8.80 = 7.20

Decrease of 10% in selling 6.40 / 14.40 * 100 1,20,000 / 44.44% 3,60,000 - 2,70,000
price = 44.44% = 2,70,000 = 90,000

S = 16 – (10% of 16)
= 14.40
C = 14.40 – 8 = 6.40
Present Sales = 25,000 *
14.40 = 3,60,000

Increase of Sales volume by 50% (Same as Original) 2,40,000 (Same as Original) 4,80,000 – 2,40,000
5000 units = 2,40,000

Sales Unit = 30,000

Present Sales = 4,80,000

Increase in fixed cost by 50% (Same as Original) 1,35,000/50% = 2,70,000 4,00,000 – 2,70,000
15,000 = 1,30,000

F = 1,35,000