Module 4:

Marginal Costing and Cost Volume Profit

Analysis

Cost and Management Accounting

 Marginal Costing
• It is the additional cost of producing an
additional unit
• In general terms, marginal cost at each level of
production includes any additional costs
required to produce the next unit. For
example, if producing additional vehicles
requires building a new factory, the marginal
cost of the extra vehicles includes the cost of
the new factory.
 It is the additional cost
Marginal of producing an
cost additional unit

It is the cost of converting raw Conversion

materials into finished goods. cost
It is the total of direct labour, direct
expenses, and factory overheads.

Costs which have direct influence on

the decision making are called
relevant relevant costs.
cost These are future costs that will
change due to managerial decision.
 KEY FACTOR
Key factor is nothing but a limiting factor or deterring factor on sales
volume, production, labour, materials and so on.

The limiting factor normally differs from one to another

Volume of sales- the limiting factor is that production of required number of

articles

Volume of production- the limiting factors are as follows in adequate supply

of raw materials, labor, inability to sell the produced articles and so on
The limiting factors are studied in the lights of the contribution. The limiting
factor is bearing the inverse relationship with the volume of contribution. To
study the worth of the business proposals among the limiting factors, the
contribution is considered as a parameter to rank them one after another.
Calculation of sales for desired profit and numerical on the same.

Example of Targeted Profit

Berhannan’s Cellular sells phones for $100. The unit variable cost per phone is $50
plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per
month, while fixed selling and administrative costs total $2,500.

Questions and Answers

A. What is the contribution margin per phone?

CM per phone = $100 - $50 - 0.1($100) = $40

B. What is the breakeven point in phones?

N = Breakeven in phones

N = $3,750 / $40 = 93.75 phones

Breakeven Point = 94 phones

C. How many phones must be sold to earn a targeted profit of $7,500?

N = Phones to be sold

N = $11,250 / $40 = 281.25 phones To achieve target profit: Must sell 282
phones