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Original Title: Marginal Costing[1]

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Marginal Costing[1]

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&

Cost-Volume-Profit

Analysis

Dr Smita Sahoo

Two Approaches to Compute

Profits

Conventional

Conventional income

income statement

statement

Contribution

Contribution margin

margin income

income statement

statement

Conventional Income

Statement

Cost of Gross

Sales – =

Goods Sold Margin

– =

Margin Expenses Income

Contribution Margin

Income Statement

Variable Contribution

Sales – =

Overhead Margin

– =

Margin Overhead Income

Breakeven Point

(BEP)

BEP for a business is the

output level( units

produced or services

provided) at which the

income from sales is just

enough to cover all

costs.

Dr. Smita Sahoo

BEP Calculation –

an Example

• Variable expense is Rs.21 per unit.

• Fixed cost is Rs.7,000.

• What is the breakeven point?

• BEP( in Units)

F ix ed C o sts

B E P=

C o n trib u tio n p er U n it

Dr. Smita Sahoo

Breakeven Point

40,000

35,000

line

30,000 Breakeven sales point u e

e v en

25,000 e s r

Sa l

Rupees

20,000 st l ine

l Co

15,000 Tota

10,000

5,000

Fixed Cost line

0

Rs. 300 500 1000

Units

Margin of Safety (MOS)

between the expected level of sales

and the BEP. The larger the margin

of safety , the more likely it is that a

profit will be made.

Profit= MOS X Contribution per unit

Dr. Smita Sahoo

P/V or C/S Ratio

P/V R atio= X 100

Selling price per U nit

Fixed C osts

B E P in sales value

=

P/V R atio

Example-I

Rs/Unit Rs/Unit

Selling price per unit 100

DM 22

DL 16

Variable overhead 14

Fixed overhead 18 70

Profit per unit 30

normal capacity of 2000 units per month.

Assume that FC per month will remain same

through out the year. Budgeted sales for the

next month are 3,500 units.

Dr. Smita Sahoo

You are required to

calculate:

per month;

II. Margin of safety for the next month;

III. Budgeted profit for the next month;

IV. The sales required to achieve a

profit of Rs.108,000 in a month.

Limitations of BEP/CVP

Analysis

i. Costs are assumed to behave in a linear

fashion.

ii. Sales revenues are assumed to be

constant for each unit sold.

iii. It is assumed that there is no changes in

stocks.

iv. It is assumed that activity is the only

factor affecting costs, and factors such as

inflation are ignored. This limits BEP

analysis to short-term decision making.

Limiting factor decision-making

A limiting factor is any factor which is

in scarce supply and which stops the

organisation from expanding its

activities further.

Decision rule can be stated as ‘

maximising the contribution per unit

of limiting factor’.

Example : Profit Statement using

Marginal Costing & Absorption

Costing

A company produces & sells one product only which sells

for Rs50 per unit. There were no stocks at the end of

May & other information are as follows.

Rs.

Standard cost per unit:

Direct Material 18.00

Direct Labour 4.00

Variable production overhead 3.00

Budgeted & actual costs per month:

Fixed production overhead 99,000

Fixed selling exp. 14,000

Fixed admn. Exp. 26,000

Variable selling exp. 10% of Sales value

Dr. Smita Sahoo

Example : Profit Statement using

Marginal Costing & Absorption

Costing

Normal Capacity is 11,000 units per month.

The number of units produced & sold was:

June July

Units Units

Sales 12,800 11,000

Reconciliation of profit

June July

Marginal Costing profit 117,000 81,000

Adj. for fixed overhead in stock:

Stock increase( 1200 X9) 10,800

Stock decreases (800 X 9) (7,200)

Note: If stocks↑ then Absorption costing profit will be

more

& if stocks↓ marginal costing profit will be higher.

Dr. Smita Sahoo

Relevant & Non-relevant Costs

be affected by the decision being

taken. If a cost will remain

unaltered regardless of the decision

being taken, then it is called a

non-relevant cost.

Examples of non-relevant costs

• Sunk or past costs

• Absorbed fixed overhead

• Future Expenditure

• Historical cost

• Notional Costs

Opportunity Costs

when one course of action is chosen,

in preference to an alternative . The

opportunity cost is represented by

the forgone potential benefit from

the best rejected course of action.”

An opportunity cost is a special type

of relevant cost.

Dr. Smita Sahoo

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