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Marginal Costing


Dr Smita Sahoo
Two Approaches to Compute

Conventional income
income statement

Contribution margin
margin income
income statement

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Conventional Income

Cost of Gross
Sales – =
Goods Sold Margin

Gross Operating Net

– =
Margin Expenses Income

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Contribution Margin
Income Statement

Variable Contribution
Sales – =
Overhead Margin

Contribution Fixed Net

– =
Margin Overhead Income

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Breakeven Point
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
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BEP Calculation –
an Example

• Assume selling price is Rs.35 per unit.

• 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
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Breakeven Point
30,000 Breakeven sales point u e
e v en
25,000 e s r
Sa l

20,000 st l ine
l Co
15,000 Tota
Fixed Cost line
Rs. 300 500 1000

Dr. Smita Sahoo

Margin of Safety (MOS)

Margin of Safety is the difference

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.

MOS= Projected sales – BEP

Profit= MOS X Contribution per unit
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P/V or C/S Ratio

C ontribution per U nit

P/V R atio= X 100
Selling price per U nit
Fixed C osts
B E P in sales value
P/V R atio

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Rs/Unit Rs/Unit
Selling price per unit 100
DM 22
DL 16
Variable overhead 14
Fixed overhead 18 70
Profit per unit 30

Fixed overhead absorption rate is based on the

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.
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You are required to

I. The breakeven point in sales units

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.

Dr. Smita Sahoo

Limitations of BEP/CVP
i. Costs are assumed to behave in a linear
ii. Sales revenues are assumed to be
constant for each unit sold.
iii. It is assumed that there is no changes in
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.

Dr. Smita Sahoo

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’.

Dr. Smita Sahoo

Example : Profit Statement using
Marginal Costing & Absorption
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.
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
Normal Capacity is 11,000 units per month.
The number of units produced & sold was:

June July
Units Units
Sales 12,800 11,000

Production 14,000 10,200

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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)

Absorption costing profit 127,800 73,800

Note: If stocks↑ then Absorption costing profit will be
& if stocks↓ marginal costing profit will be higher.
Dr. Smita Sahoo
Relevant & Non-relevant Costs

Relevant costs are those which will

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.

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Examples of non-relevant costs
• Sunk or past costs
• Absorbed fixed overhead
• Future Expenditure
• Historical cost
• Notional Costs

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Opportunity Costs

“The value of the benefit sacrificed

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