CMA (Unit 5)

Cost and Management Accounting
UNIT – V COST AND MANAGEMENT ACCOUNTING

Budgeting – Types of Budgets – Preparation of Various Budgets – Zero Base
Budgeting – Marginal Costing – Cost Volume Profit Analysis – (Theory & Problems)
BUDGETING
Budget is a detailed plan of operations for some specific future period. It is an
estimated prepared in advance of the period to which it applies. It acts as a business
barometer as it is a complete programme of activities of the business for the period
covered.
“Budget is an estimate of future needs arranged according to an orderly basis,

covering some or all of the activities of an enterprises for definite period of time”
– George R Terry
Budgeting is the most common, useful and widely used standard device of planning
and control. Budgeting or Planning has become the primary function of management
these days. Most of the planning relates to individual situations and individual
proposals. However, this has to be supplemented and reinforced by overall periodic
planning followed by continuous comparison of the actual performance with the
planned performance.
TYPES OF BUDGETS
There are several types of budgets such as Fixed Budget, Flexible Budget, Long Term
Budget, Short Term Budget, Current Budget, Zero Base Budget, etc.
 Fixed budget remains unchanged irrespective of the level of activity actually

attained.
 Flexible budget is designed to change in accordance with the level of activity.
 Long term budget is prepared for the period of 5 to 10 years
 Short term budget is prepared for the period of 1 to 2 years
 Current budget is prepared for the period of few months and weeks
 Zero base budget (ZBB) is equalizing the expenditure with budgeted figures
and to control the cost. No previous figure is to be taken as a base figure for
adjustments and each activity is to be examined afresh.
Budgets can be classified into different categories from different point of view. The
following are most common basis of classification.
(1) According to Time
(2) According to Function
(3) According to Flexibility
Classification According to Time

In terms of time, the Budget can broadly be classified into four categories:
Dr.S.N.Selvaraj, M.B.A., M.Phil., Ph.D., Assistant Professor, Dr.N.G.P. Arts and Science College Page 1
1. Long-term Budget: A budget designed for a long period, generally for a period of 5
to 10 years, is termed as a Long-term Budget. These budgets are concerned with
planning of the operations of a firm over a considerably long period of time.
2. Short-term Budget: These budgets are designed for a period generally not
exceeding 5 years. They are generally prepared in physical as well as in monetary
units.
3. Current Budgets: These budgets cover a very short period, say, a month or a
quarter. They are essentially short-term budgets adjusted to current conditions or
prevailing circumstances.
4. Rolling Budgets: Some companies follow the practice of preparing a rolling or
progressive budget. In case of such companies there will always be a budget for a
year in advance. A new budget is prepared after the end of each month/quarter for
a full year ahead.
Classification According to Function

Budgets can be classified on the basis of functions they are meant to perform. These
budgets are, therefore, also termed as Functional Budgets. The following are the usual
functional budgets.
1. Sales Budget: The budget forecasts total sales in terms of quantity, value, items,
periods, areas, etc.
2. Production Budget: The budget is based on Sales Budget. It forecasts quantity of
production in terms of items, periods, areas, etc.
3. Cost of Production Budget: The budget forecasts the cost of production. Separate
budgets are prepared for different elements of costs.
4. Purchase Budget: The budget forecasts the quantity and value of purchase required
for production. It gives quantity-wise, money-wise and period-wise information
about the materials to be purchased.
5. Personnel Budget: The budget anticipates the quantity of personnel required during
a period for production activity. This may be further split up between direct and
indirect personnel budgets.
6. Research Budget: The budgets relates to the research work to be done for
improvement in quality of the products or research for new products.
7. Capital Expenditure Budget: The budget provides a guidance regarding the amount
of capital that may be required for procurement of capital assets during the budget
period.
8. Cash Budget: The budget is a forecast of the cash position by time period for a
specific duration of time. It states the estimated amount of cash receipts and the
estimation of cash payments and the likely balance of cash in hand at the end of
different periods.
9. Master Budget: It is a summary budget incorporating all functional budgets in
capsule form. It interprets different functional budgets and covers within its range
the preparation of projected income statement and projected balance sheet.
Classification According to Flexibility

On the basis of flexibility, budgets can be divided into two categories:
1. Fixed Budget: A budget prepared on the basis of a standard or a fixed level of

activity is called a fixed budget. It does not change with the change in the level of
activity.
2. Flexible Budget: A budget designed in a manner so as to give the budgeted cost of
any level of activity is termed as a flexible budget. Flexible budget gives different
budgeted costs for different levels of activity.
Distinction between Fixed Budget and Flexible Budget

The following are the main differences between these two budgets:
Point of
Fixed Budget Flexible Budget
Distinction
It is flexible and can be
It is inflexible and does not
suitably re-casted quickly
Flexibility change with the actual volume
according to level of activity
of output achieved
attained.
Classification Costs are not classified Costs are classified according
of costs according to their variability. to the nature of their variability
Comparison of actual and Comparison of actual and
Comparison budgeted performance cannot budgeted performance can be
be done. done
It clearly shows the impact of
It is difficult to forecast
Forecasting various expenses of the
accurately the results in it.
business.
It is not possible to ascertain
Ascertainment Costs can be easily ascertained
cost correctly at different
of costs at different levels of activity
levels.
PREPARATION OF VARIOUS BUDGETS
Problem
The expenses budgeted for production of 10,000 units in a factory is furnished below:
Per unit (₹)
Materials 70
Labour 25
Variable Factory Overheads 20
Fixed Factory Overheads (Rs.1,00,000) 10
Variable Expenses (Direct) 5
Selling Expenses (10% fixed) 13
Distribution Expenses (20% fixed) 7
Administrative Expenses (Fixed – Rs.50,000) 5
Total cost of sales per unit 155
You are required to prepare a budget for the production of 6000 units and 8,000 units.
Solution
FLEXIBLE BUDGET
Output 6000 units Output 8000 units
Particulars Per unit Amount Per unit Amount
(₹) (₹) (₹) (₹)
Production Expenses:
Material 70.00 4,20,000 70.00 5,60,000
Labour 25.00 1,50,000 25.00 2,00,000
Direct Variable Expense 5.00 30,000 5.00 40,000
Prime Cost 100.00 6,00,000 100.00 8,00,000
Factory Overheads:
Variable overheads 20.00 1,20,000 20.00 1,60,000
Fixed overheads 16.67 1,00,000 12.50 1,00,000
Works Cost 136.67 8,20,000 132.50 10,60,000
Administrative Expenses fixed 8.33 50,000 6.25 50,000
Cost of Production 145.00 8,70,000 138.75 11,10,000
Selling Expenses:
Fixed 10% of ₹13 2.17 13,000 1.63 13,000
Variable 90% of ₹13 11.70 70,200 11.70 93,600
Distribution Expenses:
Fixed 20% of ₹7 2.33 14,000 1.75 14,000
Variable 80% of ₹7 5.60 33,600 5.60 44,800
Total Cost of Sales 166.80 10,00800 159.43 12,75,400
Problem
Excellent Manufacturers can produce 4000 units of a certain product at 100%
capacity. The following information is obtained from the books of accounts.
August, 2001 September, 2001
Units produced 2800 3600
₹ ₹
Repair and maintenance 500 560
Power 1,800 2,000
Shop labour 700 900
Consumable stores 1,400 1,800
Salaries 1,000 1,000
Inspection 200 240
Depreciation 1,400 1,400
The rate of production per hour is 10 units. Direct material cost per unit is Re.1 and
direct wages per hour is Rs.4. You are required to –
a) Compute the cost of production at 100%, 80% and 60% capacity showing the
variable, fixed and semi-fixed items under the flexible budget; and
b) Find out the overhead absorption rate per unit at 80% capacity.
Solution:
(a) COST OF PRODUCTION UNDER FLEXIBLE BUDGET
Capacity
Item
100% 80% 60%
Units 4000 3200 2400
Production hours @ 10 units/ hour 400 320 240
₹ ₹ ₹
Direct Material 4,000 3,200 2,400
Direct Wages 1,600 1,280 960
Prime Cost 5,600 4,480 3,360
Production Overhead Variable:
Shop Labor 1,000 800 600
Consumable Stores 2,000 1,600 1,200
Semi-Variable:
Power 2,100 1,900 1,700
Repair & Maintenance 590 530 470
Inspection 260 220 180
Fixed:
Depreciation 1,400 1,400 1,400
Salaries 1,000 1,000 1,000
Total Overheads 8,350 7,450 6,550
Cost of Production 13,950 11,930 9,910

Cost of Production per unit 3.49 3.73 4.13
(b) Total overhead at 80% for 3200 units ₹7,450 i.e. ₹2.33 per unit should the
overhead absorption rate.
Workings:
Calculation of semi-variable overheads:
Power Difference in capacity Difference in overhead (₹)
20% 200
1% 10
At 80% variable cost is 80×₹10 = Rs.800 and fixed cost is ₹1,100.

In the same way it can be calculated for 100% and 60% capacity. Same way may be
followed for repair and maintenance and inspection.
CASH BUDGET
Cash budget makes a provision for a minimum cash balance which will be available at
all times. In general, this balance should be equal to one month‟s operating expenses
plus some provision for contingencies. The minimum balance of cash will help in
tiding over adverse conditions of a minor nature. Meanwhile, management can make
alternative arrangement for additional cash.
Problem
Prepare a Cash Budget for the months of May, June and July, 2008 on the basis of the
following information:
(1) Income and Expenditure Forecasts:
Credit Credit Manufg. Office Selling
Wages
Months Sales Purchases Expenses Expenses Expenses
(Rs.)
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
March 60,000 36,000 9,000 4,000 2,000 4,000
April 62,000 38,000 8,000 3,000 1,500 5,000
May 64,000 33,000 10,000 4,500 2,500 4,500
June 58,000 35,000 8,500 3,500 2,000 3,500
July 56,000 39,000 9,500 4,000 1,000 4,500
August 60,000 34,000 8,000 3,000 1,500 4,500
(2) Cash balance on 1st May, 2008 Rs.8,000

(3) Plant costing Rs.16,000 is due for delivery in July, payable 10% on delivery
and the balance after 3 months.
(4) Advance Tax of Rs.8,000 each is payable in March and June
(5) Period of credit allowed by supplier is 2 months and allowed to customers is 1
month.
(6) Lag in payment of manufacturing expenses – ½ month.
(7) Lag in payment of office and selling expenses – one month.
Solution
CASH BUDGET
May 2008 June 2008 July 2008
Particulars
Rs. Rs. Rs.
Opening Balance 8,000 13,750 12,250
Estimated Cash Receipts:
Debtors (Credit Sales) 62,000 64,000 58,000
70,000 77,750 70,250
Estimated Cash Payments:
Creditors (Credit Purchases) 36,000 38,000 33,000
Wages 10,000 8,500 9,500
Manufacturing Expenses 3,750 4,000 3,750
Office Expenses 1,500 2,500 2,000
Selling Expenses 5,000 4,500 3,500
Plant – payment on delivery ---- ---- 1,600
Advance Tax ---- 8,000 -----
Total 56,250 65,500 53,350
Closing Balance 13,750 12,250 16,900
PRODUCTION BUDGET
Problem (Production Budget)
A manufacturing company submits the following figures relating to Product X for the
first quarter of 2010.
Sales Targets: January 60,000 units
February 48,000 units
March 72,000 units
st
Stock position: 1 January 2010 (% of January 2001 sales) ― 50%
31st March 2010 ― 40,000 units
End January & February ― 50%
(% of subsequent month‟s sales)
You are required to prepare production budget for the first quarter of 2010.
Solution
PRODUCTION BUDGET FOR THE 1ST QUARTER OF 2010
Month Sales (units) closing stock Opening stock Production
(units) (units) (units)
January 60,000 24,000 30,000 54,000
February 48,000 36,000 24,000 60,000
March 72,000 40,000 36,000 76,000
Total 1,90,000
SALES BUDGET
Problem (Sales Budget)
A manufacturing company submits the following figures of product „X‟ for the first
quarter of 2009.
Sales (in units) January 50,000
February 40,000
March 60,000
Selling price per unit Rs.100
Target of 1st Quarter 2010

Sales quantity increase 20%
Sales price increase 10%
Prepare sales budget for the first quarter of 2010.
Solution
SALES BUDGET
for the first quarter of 2010
Month Units Price per unit (Rs) Value (Rs)
January 60,000 110 66,00,000
February 48,000 110 52,80,000
March 72,000 110 79,20,000
Total 1,80,000 1,98,00,000
MARGINAL COSTING
The increase in one unit of output, the total cost is increased and this increase in total
cost from the existing to the new level is known as Variable Cost.
The amount at any given volume of output by which aggregate costs are changed if
the volume of output is increased or decreased by one unit. In practice this is
measured by the total variable attributable to one unit.
Advantages of Marginal Costing

(a) Effective in cost control: It divides cost into fixed and variable. Since fixed cost
is excluded from product, management can control marginal cost effectively.
(b) Helpful to management: It enables the management to start a new line of
production which is advantageous. It is helpful in determining which is
profitable – whether to buy or manufacture a product. The manager can take
decision regarding pricing and tendering.
(c) Helps in production planning: It shows the amount of profit at every level of
output with the help of cost volume profit relationship. Here, the break-even
chart is made use of.
(d) Fixation of selling price: The differentiation between fixed costs and variable
costs is very helpful in determining the selling price of the products or services.
(e) Helpful in budgetary control: The classification of expenses is very helpful in
budgeting and flexible budget for various levels of activities.
COST VOLUME PROFIT ANALYSIS

Cost-Volume-Profit analysis is a technique for studying the relationship between cost,
volume and profit. Profits of an undertaking depend upon a large number of factors.
But the most important of these factors are the cost of manufacture, volume of sales
and the selling prices of the products.
According to Herman C Heiser, “The most significant single factor in profit planning
of the average business is the relationship between the volume of business, costs and
profits”.
Techniques of CVP Analysis

The CVP analysis deals with the prices, costs structure and the sales volume and
identifies the profit figure with one or other combination of these variables. The key
elements in the CVP analysis are selling prices, sales volume, variable cost per unit,
total fixed costs and the sales mix (if the firm is dealing with more than one product at
a time).
There are three basic techniques of CVP analysis as follows:
Techniques of CVP Analysis
Contribution Margin Analysis

Profit / Volume Ratio
Break Even Analysis
Contribution Margin Analysis

Contribution is the difference between sales and variable cost or marginal cost of
sales. It may also be defined as the excess of selling price over variable cost per unit.
Contribution is also known as Contribution Margin (or) Gross Margin. Contribution
being the excess of sales over variable cost is the amount that is contributed towards
fixed expenses and profit.
Contribution can be represented as:

Contribution = Sales – Variable (Marginal) Cost
Contribution (per unit) = Selling price – Variable (Marginal) cost per unit
Contribution = Sales – Variable Cost [C = S–V]
Contribution = Fixed Cost ± Profit [C = F+P]
Profit = Contribution – Fixed Cost
Sales–Variable Cost = Fixed Cost + Profit [S–V = F+P]
Marginal Cost Equation can be represented as:

Marginal Cost = Prime Cost + Variable Cost
Sales – Variable cost = Contribution
Variable cost + Contribution = Sales
Sales = Variable Cost + Fixed Cost ± Profit or Loss
Sales –Variable Cost = Fixed Cost ± Profit or Loss
Sales –Variable Cost = Contribution
From the above equations we can understand that in order to earn profit, the
contribution must be more than the fixed cost. To avoid any loss, the contribution
must be equal to fixed cost.
Problem
From the following information find out the amount of profit earned during the year
using the marginal costing technique:
Fixed cost = Rs.2,50,000
Variable cost = Rs.10 per unit
Selling price = Rs.15 per unit
Output level = 75,000 units
Solution
The marginal cost equation is:
Sales = 75,000 × Rs.15 = Rs.11,25,000

Variable cost = 75,000 × Rs.10 = Rs.7,50,000
Fixed cost = Rs.2,50,000
Profit =?

11,25,000 – 7,50,000 = 2,50,000 + Profit
3,75,000 = 2,50,000 + Profit
Profit = 3,75,000 – 2,50,000
= Rs.1,25,000
Problem
From the following information, find out the amount of profit earned during the year
using marginal costing technique:
Fixed Cost Rs.5,00,000
Variable Cost Rs.10 per unit
Selling Price Rs.15 per unit
Output level 1,50,000 units
Solution
Contribution = Selling price – Marginal cost
(1,50,000 × 15) – (1,50,000 × 10)
Rs.22,50,000 – 15,00,000
Rs.7,50,000
Contribution = Fixed Cost + Profit

Rs.7,50,000 = Rs.5,00,000 + Profit
Profit = Rs.7,50,000 – Rs.5,00,000
= Rs.2,50,000
Profit Volume Ratio (P/V Ratio)

Profit volume ratio, which is popularly known as P/V Ratio, expresses the relationship
of contribution to sales. Another name for this ratio is Contribution-Sales Ratio (or)
Marginal-Income Ratio or Variable-Profit Ratio. The ratio, expressed as a percentage,
indicated the relative profitability of different products.
The formula for computing the P/V Ratio is:
P/V Ratio = Contribution [C/S]

Sales
(or)
= Fixed Cost + Profit [F+P/S]
Sales
(or)
= Sales – Variable Cost [S–V/S]
Sales
(or)
= Change in Profit (or) Contribution
Change in Sales
One important characteristic of P/V ratio is that it remains the same at all levels of
output. P/V ratio is particularly useful when it is considered in conjunction with
margin of safety.
The formula for the sales volumes required to earn a given profit is:
P/V Ratio = Contribution

Sales
(or)
= Fixed Cost + Profit
Sales
Sales = Fixed Cost + Profit = F + P

P/V Ratio P/V Ratio
Problem
From the following information calculate (i) P/V ratio, (ii) Fixed cost, (iii) Sales
volume to earn a Profit of Rs.40,000.
Sales Rs.1,00,000
Profit Rs.10,000
Variable cost Rs.70%
Solution
Sales = Rs.1,00,000
Variable Cost = 1,00,000 × 70% = Rs.70,000
Contribution = Sales – Variable cost
= 1,00,000 – 70,000 = Rs.30,000
(i) P/V Ratio = Sales – Variable cost × 100

Sales
= 1,00,000 – 70,000 × 100 = 30%
1,00,000
(ii) Contribution = Fixed Cost + Profit

30,000 = FC + 10,000
Fixed Cost = 30,000 – 10,000 = 20,000
(iii) Sales = Fixed Cost + Profit (desired)

P/V Ratio
= 20,000 + 40,000 = 60,000 ×100 = Rs.2,00,000
30% 30
Problem
The sales turnover and profit during two years were as follows:
Year Sales (Rs) Profit (Rs)
1994 1,40,000 15,000
1995 1,60,000 20,000
You are required to calculate:
a) P/V Ratio
b) Sales required to earn a profit of Rs.40,000
c) Profit when sales are Rs.1,20,000
Solution
(a) P/V Ratio = Change in Profit × 100
Change in Sales
= (5,000 /20,000) × 100 = 25%
(b) Sales required to earn profit of Rs.40,000

P/V Ratio = Fixed Cost + Profit
Sales
25 = FC + 15,000
100 1,40,000
1,40,000 × 25 = FC + 15,000
100
35,000 – 15,000 = FC
Fixed Cost = Rs.20,000
Desired Sales = Fixed cost + Profit = 20,000 + 40,000 = Rs.2,40,000

P/V Ratio 25%,
(c) Profit when sales are Rs.1,20,000

Sales = Fixed Cost + Profit
P/V Ratio
Sales × P/V Ratio = Fixed Cost + Profit
1,20,000 × 25% = 20,000 + Profit
30,000 = 20,000 + Profit
Profit = 30,000 – 20,000 = Rs.10,000
Break-Even Analysis
Break-even analysis is also known as cost volume profit analysis. This analysis is a
tool of financial analysis whereby the impact on profit of the changes in volume,
price, costs and mix can be estimated with reasonable accuracy.
Break-even point
Break-even point is a point where the total sales are equal to total cost. In this point
there is no profit or loss in the volume of sales.
The formula to calculate break-even point is:

B.E.P. (in units) = Total Fixed Cost
Contribution per unit
(or)
= Fixed Cost
Selling price per unit – Variable cost per unit
It can be expressed in percentage. Normally, this ratio is expressed in percentage.

When we know the P/V ratio, B.E.P. can be calculated, by using the formula:
B.E.P. (Sales Volume) = Fixed Cost [F / PV Ratio]

P/V Ratio
(or)
= Fixed Cost × Sales
Sales – Variable Cost
P/V ratio is very important in decision-making. It can be used for the calculation of
B.E.P. and in problems regarding profit sales relationship.
1. B.E.P. = Fixed Cost [F / PV Ratio]

P/V Ratio
2. Fixed Cost = B.E.P × P/V ratio
3. Sales required in units to maintain a desired profit

= Fixed Cost + Desired Profit [F+P / PV Ratio]
P/V Ratio
= Required contribution
New contribution per unit
4. Contribution = Sales × P/V ratio

5. Variable Costs = Sales (1–P/V ratio)
Problem
From the following information, calculate the break-even point in units and in sales
value.
Output 3000 units
Selling price per unit Rs.30
Variable cost per unit Rs.20
Total fixed cost Rs.20,000
Solution
Break-Even Point (in units)
= Fixed Cost
Selling price per unit – Variable cost per unit
= 20,000 = 20,000
30 – 20 10
= 2000 units
Break-Even Point (in sales value)

= Fixed Cost × Sales
Sales – Variable Cost
= 20,000 × 90,000 = 20,000 × 90,000
90,000 – 60,000 30,000
= Rs.60,000
Otherwise, B.E.P. is 200 units, break-even sales would be: 2000 × 30 = 60,000
Margin of Safety
Margin of Safety is an important concept in Marginal Costing Approach. A total sale
minus the sales at break-even point is known as the Margin of Safety (M/S). That is
Margin of Safety is the excess of normal or actual sales over sales at break-even point.
Margin of Safety = Actual Sales – Sales at BEP

(or) = Profit / PV ratio
(or) = Profit / Contribution
As a percentage = Margin of Safety *100
Total Sales
Problem
From the following details find out (a) Profit Volume Ratio, (b) B.E.P., (c) Margin of
Safety. Rs.
Sales 1,00,000
Total Costs 80,000
Fixed Costs 20,000
Net Profit 20,000
Solution
(a) P/V Ratio = Sales – Variable expenses × 100
Sales
= 1,00,000 – 60,000 × 100 = 40%
1,00,000
(b) B.E.P. = Fixed Cost = 20,000 ×100 = Rs.50,000

P/V Ratio 40
(c) Margin of Safety = Profit = 20,000 ×100 = Rs.50,000

P/V Ratio 40
(or)
Margin of Safety = Actual Sales – Sales at BEP
= 1,00,000 – 50,000 = Rs.50,000
Problem
The following information was obtained from a Company in a certain year:
Sales Rs.1,00,000
Variable Cost Rs. 60,000
Fixed Cost Rs. 30,000
Find the P/V Ratio, Break-even Point and Margin of Safety.
Solution
P/V Ratio = S – V ×100 = 1,00,000 – 60,000 ×100 = 40%
S 1,00,000
Break-Even Point = Fixed Cost = 30,000 = Rs.75,000

P/V Ratio 40%
Margin of Safety = Profit = 10,000 = Rs.25,000

P/V Ratio 40%
(or)
= Sales – Break-Even Sales= 1,00,000 – 75,000 = Rs.25,000
Decision Making Under Marginal Costing System

Marginal Costing helps the management in decision-making in respect of the
following vital areas:
 Cost Control
 Fixation of Selling Price
 Closure of a Department or Discontinuing a Product
 Selection of a Profitable Product Mix
 Profit Planning
 Decision to Make or Buy
 Decision to Accept a Bulk Order
 Maintaining a Desired Level of Profit
 Level of Activity Planning
 Alternative Methods of Production
Text Books & References

1. S.P.Jain and K.L.Narang, “Cost Accounting Principles and Practice”, Sultan
Chand and Sons,New Delhi, 5th Edition, 2001.
2. Shashi K Gupta and Sharma R.K., “Cost and Management Accounting, Kalyani
Publishers, New Delhi, __ Edition, 2003
3. S.N.Maheswari, “Cost and Management Accounting”, Sultan Chand and Sons,
New Delhi, 9th Edition, 2000.

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Cost and Management Accounting

UNIT – V COST AND MANAGEMENT ACCOUNTING

“Budget is an estimate of future needs arranged according to an orderly basis,

 Fixed budget remains unchanged irrespective of the level of activity actually

Classification According to Time

Classification According to Function

Classification According to Flexibility

1. Fixed Budget: A budget prepared on the basis of a standard or a fixed level of

Distinction between Fixed Budget and Flexible Budget

PREPARATION OF VARIOUS BUDGETS

Cost of Production 13,950 11,930 9,910

At 80% variable cost is 80×₹10 = Rs.800 and fixed cost is ₹1,100.

(2) Cash balance on 1st May, 2008 Rs.8,000

Target of 1st Quarter 2010

Advantages of Marginal Costing

COST VOLUME PROFIT ANALYSIS

Techniques of CVP Analysis

There are three basic techniques of CVP analysis as follows:

Techniques of CVP Analysis

Contribution Margin Analysis

Break Even Analysis

Contribution Margin Analysis

Contribution can be represented as:

Marginal Cost Equation can be represented as:

Sales = 75,000 × Rs.15 = Rs.11,25,000

Sales –Variable Cost = Fixed Cost ± Profit or Loss

Contribution = Fixed Cost + Profit

Profit Volume Ratio (P/V Ratio)

The formula for computing the P/V Ratio is:

P/V Ratio = Contribution [C/S]

P/V Ratio = Contribution

Sales = Fixed Cost + Profit = F + P

(i) P/V Ratio = Sales – Variable cost × 100

(ii) Contribution = Fixed Cost + Profit

(iii) Sales = Fixed Cost + Profit (desired)

(b) Sales required to earn profit of Rs.40,000

Desired Sales = Fixed cost + Profit = 20,000 + 40,000 = Rs.2,40,000

(c) Profit when sales are Rs.1,20,000

The formula to calculate break-even point is:

It can be expressed in percentage. Normally, this ratio is expressed in percentage.

B.E.P. (Sales Volume) = Fixed Cost [F / PV Ratio]

1. B.E.P. = Fixed Cost [F / PV Ratio]

2. Fixed Cost = B.E.P × P/V ratio

3. Sales required in units to maintain a desired profit

4. Contribution = Sales × P/V ratio

Break-Even Point (in sales value)

Margin of Safety = Actual Sales – Sales at BEP

(b) B.E.P. = Fixed Cost = 20,000 ×100 = Rs.50,000

(c) Margin of Safety = Profit = 20,000 ×100 = Rs.50,000

Find the P/V Ratio, Break-even Point and Margin of Safety.

Break-Even Point = Fixed Cost = 30,000 = Rs.75,000

Margin of Safety = Profit = 10,000 = Rs.25,000

Decision Making Under Marginal Costing System

Text Books & References

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