2 marginal costing

8/4/2019 2 Marginal Costing

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marginal costing


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Why do we study Marginal Costing?


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What do we study in Marginal Costing?and

Why do we Study MC?Marginal CostMarginal CostingDirect CostingAbsorption CostingContributionProfit Volume AnalysisLimiting Factor/key factorBreak Even AnalysisProfit Volume Chart

ManagementDecisionMaking


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Marginal Cost

Marginal cost is amount at any givenvolume of out put by which aggregatecosts are changed..

if volume of outputis increased or decreased by one unit


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Marginal Cost

Marginal cost is amount at any givenvolume of out put by which aggregatecosts are changed if volume of outputis increased or decreased by one unit

1) Manufacture 100 radio1)Variable costs Rs150p.u

Fixed cost Rs 50002) If Manufacture 101 radios

Marginal Cost 100 x150= 15000Fixed Cost = 5000

total 20000

Marginal cost 150 x101=15150Fixed Cost = 5000

TOTAL 20150

1

2

additional Cost=Rs 150


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Marginal Costing

What Could be effects of

Changes

In volume

or

Type of output


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Marginal Costing


Changes

In volume

or

Type of output

1 lakh unitsTo

2 lakh units


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Marginal Costing


Changes

In volume

or

Type of output

From OneModel of

Car to

Another

From One

Size ofproduct to

another


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Marginal Costing ---Characteristics

Fixed & VariableCosts

MC Costs asProducts Costs

Fixed Costs asPeriod Costs

InventoryValuation

Contribution

Pricing

Marginal Costing&

Profit


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SegregationFixed & Variable

Costs

Semi-variable costsare segregated

into fixed &variable


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Marginal Costsas

Products Costs

Only Variable costsare chargedto products


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Fixed Costs asPeriod Costs

Fixed costs treatedPeriod costs

Charged to costingP & L Account


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InventoryValuation

WIP & F goods areValued at

Marginal Cost


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Contribution

S-V=C

Profitability judged onContribution made


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Pricing

Pricing is based onContribution &Marginal Costs


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Marginal costing is also termed as variable

costing, a technique of costing which includes

only variable manufacturing costs , in the form

of direct materials, direct labour, and variablemanufacturing overheads while determining

the cost per unit of a product.


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The net profit shown by marginal costing andabsorption costing techniques may not be thesame due to the different treatment of fixed

manufacturing overheads Marginal costing technique treats fixed

manufacturing overheads as period costs, whereas in absorption costing technique these are

absorbed into the cost of goods produced and areonly charged against profit in the period in whichthose goods are sold.


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The normal level of activity for the current

year is 60,000 units, and fixed costs are

incurred evenly throughout the year.

There were no stocks of the product at the

start of the quarter, in which 16,500 units

were made and 13,500 units were sold. Actual

fixed costs were the same as budgeted.


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Marginal Costing&

Profit

A B C Total

Sales - - - ----

Less VC - - - ----

Contribution - - - ----

Fixed Cost ----

Profit -----


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Marginal Costing --- Marginal Costing Profit

Sales of A

Marginal costOf A

Contribution ofA

Total

Contribution ofA,B& C

Total FixedCost

Sales of B

Marginal costOf B

Contribution ofB

Sales of C

Marginal costOf C

Contribution ofC

less

=

less less

= =

less

= Profit/loss


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Absorption Costing

Absorption cost is a total cost technique

Under which total cost i.e. fixed & variableis charged to production.

Inventory is also valued at total cost.


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Absorption-Marginal Costing--differences

Fixed &

VariableCosts

Marginal Costing

Only variable cost

FC charged to P/L

Absorption Costing

Both F & V CostsAre charged


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Valuation

Of stock

WIP & FS

atMarginal

Cost

Total Cost


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MeasurementOf

Profitability

C=S-V P=S-V-F


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Comparative Cost Statement


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Cost Statement- Marginal Costing-production=sales

Sales (40,000 units @ Rs.15 per

unit)

(Rs.)6,00,000

Less: cost of goods

manufactured:

Material and Labor cost

Variable manufacturing

overheads

Contribution

Less: fixed overheads

other fixed overheads

Net income

3,20,000

80,000

50,000

1,00,000

4,00,000

2,00,000

1,50,000

50,000

Sales (40,000 units @ Rs.15 perunit)

6,00,000

Less: cost of goods

manufactured:

Material and Labor

costVariable manufacturing

overheads

Fixed manufacturing overheads

Gross profit

Less: other fixed overheads

Net income

3,20,000

80,000

50,000 4,50,000

1,50,000

1,00,000

50,000


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Production 1 lakh units ;Sales 80,000 units;

Selling price/unit Rs.15 ;Direct material Rs.2,50,000

Direct labour Rs.3,00,000 ;

Factory overheads:- Variable Rs.1,00,000

- Fixed Rs. 2,50,000

Selling and distribution

-Variable Rs.1,00,000

-fixed Rs.2,00,000


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Cost Statement- production> sales


(Rs.)

12,00,000

Less: cost of goods

Material

Labor cost

Factory overheads : Variable

: fixed

Less: closing stock

(20000/100000*Rs.9,00,000


Gross profit

Less :

Selling and distribution: Variable

: fixed

Net profit

2,50,000

3,00,000

1,00,000

2,50,0009,00,000

1,80,000

2,00,000

1,00,000

7,20,000

4,80,000

3,00,000

1,80,000

Sales (80,000 units @ Rs.15

per unit)

(Rs.)

12,00,000

Less: cost of goods

Material

Labor cost


Less: closing stock

(20000/100000*Rs.6,50,000

Selling and distribution:

Variable

contribution

Less : fixed FOH

fixed S&D

Net profit

2,50,000

3,00,000

1,00,000

6,50,000

1,30,000

5,20,000

1,00,000

2,50,000

2,00,000

6,20,000

5,80,000

4,80,000

4,50,000

1,30,000

absorption Marginal costing


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Cost Statement- production> sales


(Rs.)

12,00,000

Less: cost of goods

Material

Labor cost


: fixed

Less: closing stock

(20000/100000*Rs.9,00,000


Gross profit

Less :

Selling and distribution: Variable

: fixed

Net profit

2,50,000

3,00,000

1,00,000

2,50,0009,00,000

1,80,000

2,00,000

1,00,000

7,20,000

4,80,000

3,00,000

1,80,000

Sales (80,000 units @ Rs.15

per unit)

(Rs.)

12,00,000

Less: cost of goods

Material

Labor cost


Less: closing stock

(20000/100000*Rs.6,50,000

Selling and distribution:

Variable

contribution

Less : fixed FOH

fixed S&D

Net profit

2,50,000

3,00,000

1,00,000

6,50,000

1,30,000

5,20,000

1,00,000

2,50,000

2,00,000

6,20,000

5,80,000

4,80,000

4,50,000

1,30,000

absorption Marginal costing


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Concept Of Contribution


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Contribution is the difference between salesAnd the marginal (Variable) cost

Contribution =sales-variable costC= S-V

Contribution = Fixed Cost+ Profit

C= F+PThereforeS-V = F+P


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Contribution is the difference between salesAnd the marginal (Variable) cost

S-V=F+P

If any 3 factors in the equation are known

The 4th could be found out

P=S-V-FP=C-F

F=C-PS=F+P+VV=S-C.


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Sales =Rs 12,000

V Cost=RS 7,000

F Cost=Rs 4,000

C=S-V

=12,000-7000=5000

P=C-F

=5,000-4000

=Rs 1,000

PROFIT ?

S=C+V

=5,000+7,000=Rs 12,000

SALES?


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ProfitVolume Ratio (PV Ratio)(Expresses the relation of Contribution to sales)

P/V Ratio =Contribution = C/S =S-V/S

Sales

C = S XP/V Ratio

CS = --------P/V Ratio

Sales= Rs 10,000

V Cost=Rs 8,000

P/V Ratio=c/s

=S-V/S=10,000-8000/10,000=20%


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ProfitVolume Ratio (PV Ratio)

When PVRatio isGiven

C= SXPV Ratio

C= 10000X20%

=Rs 20,000


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ProfitVolume Ratio (PV Ratio)

Another Method

Change in Contribution

P/V Ratio = ---------------------------------Change in Sales

Change in profit= -----------------------

Change in Sales

1600-1000

=-------------------x 10022000-20000

600= -----------x100=30%2,0000

Year sales net profit

2005 20,000 1000

2006 22,000 1600


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What Could be the Uses of PV Ratio?

Break Even Point

Profit at Given Sales

Vol required to earn givenProfit


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How Improvement in PV Ratio Could be Achieved?

Increasing Selling Price

Reducing Variable Cost

Changing Sales Mix


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Limiting Or Key Factor

a factor in short supply


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a factor in the activities of an undertakingwhich at a point of time or over a period

will limit the volume of out put


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What Could be the Limiting Factors ?

LabourMaterialsPower

SalesCapacityMachines

.


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Cost- Volume- Profit Analysis


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Cost Of Production

Selling Prices

Volume Produced /Sold
http://images.google.co.in/imgres?imgurl=http://www.bus.duq.edu/faculty/bodnar/cvp/img003.gif&imgrefurl=http://www.bus.duq.edu/faculty/bodnar/cvp/sld003.htm&h=360&w=480&sz=9&hl=en&start=4&tbnid=y_zHQsK_28wWzM:&tbnh=97&tbnw=129&prev=/images%3Fq%3DCVP%2BANALYSIS%26svnum%3D10%26hl%3Den%26lr%3D


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Break Even Analysis

Profit Volume Chart


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What are BEP---assumptions

All costs are fixed or variableVC remains ConstantTotal FC remains ConstantSelling Price dont change With Volume

Synchronisation of Prod & Sales No Change in Productivity per workers


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Break Even Analysis

Methods

Algebraic Method

Graphic Method


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ALGEBRAIC

METHODFixed Cost

BEP (Units) = --------------- = FContribution PU S-V

Fixed CostBEP (Rs ) = ----------------- x Sales

Contribution

Fixed CostBEP (Rs) = ------------------P/V Ratio


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ALGEBRAIC

METHODFixed Cost

BEP (Units) = --------------- = FContribution PU S-V

Fixed CostBEP (Rs ) = ----------------- x Sales

Contribution

Fixed CostBEP (Rs) = ------------------P/V Ratio

F Cost=Rs 12000S Price=Rs12 pu

V Cost =Rs 9 pu

Find BEP


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Profit at diff. Sales Vol.

C

P/V Ratio= ----- = 3/12=25%S

WHEN SALES=Rs 60,000

contribution=salesxp/vratio=60000x25%=Rs 15000

Profit =contribution-fixed cost=15000-12000

=Rs3000

F Cost=Rs 12000S Price=Rs12 pu

V Cost =Rs 9 pu

Profit when sales are

a) Rs 60,000

b) Rs 1,00,000


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Other Uses

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------

P/V Ratio

F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu

Sales if desired profit

a) Rs 6000b) Rs 15,000


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Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------

P/V Ratio

12,000+6000

a)Sales= ---------------25%

=Rs 72,000

F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu

Sales if desired profit

a) Rs 6000b) Rs 15,000


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CVP Analysis -question

P ltd has earned a profit of Rs 1.80 lakh on sales ofRs 30 lakhs and V Cost of Rs 21 lakhs.work out

a)BEPb)BEP When V Cost decreases by5%c)BEP at present level when selling price reduced by5%


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b) When V Cost increases by 5%

New Variable Cost=2100000+5%=22,05,000

PV Ratio 3000000-22050003000000

=26.5%

BEP =7,20,000/ 26.5%

=Rs 27,16,981


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c)When Selling Price reduced by 5%

New SP=30000005%=Rs 28,50,000

Contribution=28,50,000-21,00,000=Rs7,50,000

PV Ratio =7500000/2850000=26.32%

FC+PROFITDesired Sales= ------------------ = 720000+1800000

PV Ratio 26.32%

=Rs 34,19,453( appx)


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BEP

Graphical Presentation

Break-Even Analysis


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Break-Even Analysis

Remember:

A higher price or lower price does not meanthat break even will neverbe reached!

The BE point depends on the sales needed togenerate revenue to cover costs


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Break-Even Analysis

Importance ofPrice Elasticity of Demand:

Higher prices might mean fewer sales to break-even

Lower prices might encourage more customers buthigher volume needed before sufficient revenuegenerated to break-even


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Break-Even Analysis

Links of BE to pricing strategies and elasticity

Penetration pricinghigh volume, low price more sales to break even


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Break-Even Analysis


Market Skimminghigh price low volumes fewer sales to break even


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Break-Even Analysis


Elasticity what is likely to happen to sales whenprices are increased or decreased?


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SabreProducts Ltd. makes and sells a single

product. The variable cost is $3/unit and the

variable cost of selling is $1/unit. Fixed costs

total $6,000 and the unit sales price is $6.

Sabre Products Ltd. budgets to make and sell

3,600 units in the next year.

Draw a breakeven chart, and a P/V graph, each

showing the expected amount of output and

sales required to breakeven, and the safety

margin in the budget.


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Marginal CostingCost Volume Chart


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2 marginal costing

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