4089958 marginal costing

8/8/2019 4089958 Marginal Costing

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m arginal c osting


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Why d o we stu dy M arginal Costing?


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Wh at d o we stu dy in Marginal Costing?

Marginal CostMarginal CostingDir e ct CostingAbsorption CostingContributionProfit Volum e Anal ysisLimiting Factor/k ey factor Br e ak Eve n Anal ysisProfit Volum e Ch art


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Wh at d o we stu dy in Marginal Costing?an d

Why d o we S tu dy MC ?Marginal CostMarginal CostingDir e ct CostingAbsorption CostingContributionProfit Volum e Anal ysisLimiting Factor/k ey factor Br e ak Eve n Anal ysisProfit Volum e Ch art

Manag e m e ntDe cisionMaking


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Marginal Cost

Marginal cost is amount at any given

volume 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 Manufactur e 100 ra d ioVariabl e costs Rs150 p uFixed cost Rs 50002 If Manufactur e 101 ra d ios

Marginal Cost 100 x150= 15000

Fixed C ost = 5000total 20000

Marginal cost 150 x101=15150Fixed C ost = 5000

TOTAL 20150

1

2

a dd itional Cost= Rs 150


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Marginal Costing

marginal costing is ascertainment of marginal costing is ascertainment of marginal cost by differentiating betweenmarginal cost by differentiating betweenfixed fixed and and variablevariable costscosts

and of theand of the effect effect of of changes in volumechanges in volume or type of output or type of output


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Marginal Costing

W hat Could be effects of W hat Could be effects of

ChangesChanges

In volumeIn volumeor or Type of output Type of output


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Marginal Costing


ChangesChanges

In volumeIn volumeor or Type of output Type of output

1 lak h unitsTo

2 lak h units


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Marginal Costing


ChangesChangesIn volumeIn volumeor or Type of output Type of output

From On eMo de l of

Car toAnot he r

From On e

S ize of pro d uct to

anot he r


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Marginal Costing ---Ch aract e ristics

Fixed & V ariabl eCosts

MC C osts asPro d ucts Costs

Fixed C osts asP e rio d C osts

In ve ntor yValuation

Contribution

Pricing

Marginal Costing&

Profit


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Se gr e gationFixed & V ariabl e

Costs

Se mi -variabl e costsar e s e gr e gat ed

into fixed &variabl e


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Marginal Costs as

Pro d ucts Costs

Onl y Variabl e costsar e c h arg edto pro d ucts


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Fixed C osts asP e rio d C osts

Fixed costs tr e at edP e rio d costs

Ch arg ed to costingP & L Account


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In ve ntor yValuation

WIP & F goo d s ar eValu ed at

Marginal Cost


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Contribution

S-V =C

Profitabilit y ju d g ed onContribution ma de


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Pricing

Pricing is bas ed onContribution &Marginal Costs


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Marginal Costing&

Profit

A B C Total

S al e s - - - ----

Le ss VC - - - ----

Contribution - - - ----

Fixed C ost ----

Profit -----


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Marginal Costing --- Marginal Costing Profit

S al e s of A

Marginal costOf A

Contribution of A

Total

Contribution of A,B & C

Total FixedCost

S al e s of B

Marginal costOf B

Contribution of B

S al e s of C

Marginal costOf C

Contribution of C

le ss

=

le ss l e ss

= =

le ss

= Profit/loss


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Absorption Costing

Absorption cost is a total cost te c h niqu eAbsorption cost is a total cost te c h niqu eUn de r wh ic h total cost ieUn de r wh ic h total cost ie fix ed & v ariabl efix ed & v ariabl eis c h arg ed to pro d uction.is c h arg ed to pro d uction.

In ve ntor y is also valu ed at total cost. In ve ntor y is also valu ed at total cost.


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Absorption -Marginal Costing --d iff e r e nc e s

Fixed &Variabl e

Costs

Me asur e m e ntOf

Profitabilit yValuationOf stock


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Fixed &Variabl e

Costs

Marginal Costing

Onl y v ariabl e cost

FC c h arg ed to P/L

Absorption Costing

Bot h F & V C ostsAr e c h arg ed


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Valuation

Of stock

WIP & FS

at Marginal

Cost

Total Cost


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Me asur e m e ntOf

Profitabilit y

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


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Marginal Costing

Mont h s1 2 3 Total Rs Rs Rs Rs

Absorption Costing


(A)S al e s 2,00,000 1,65,000 2, 35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000

Op e ning S tock 84 ,000 84 ,000 1,05,000 2,7 3,000 1,0 8,000 1,0 8,500 1, 35,625 3,52,625Add V C ost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000

F C ost _ _ _ _ 3 5,000 35,000 35,000 1,05,000

Total Cost 2,0 4,000 2,0 4,000 2,25,000 6, 33 ,000 2,6 3,000 2,6 3,000 2,90,625 8,17,625

Le ss C S tock 84 ,000 1,05,000 84 ,000 2,7 3,000 1,0 8,000 1, 35,625 1,0 8,500 3,52,625

(B) COG S 1,20,000 99,000 1, 41,000 3,60,000 1,55,000 1,27, 875 1, 82,125 4,65,000

Contribution (A-B)c 80,000 66,000 94,000 2, 40,000 _ _ _ _

( D) F C ost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1, 35,000

(A-B)45,000 37,125 52, 875 1,35000

Comparati ve C ost S tat e m e nt


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Marginal Costing


Absorption Costing


(A)S al e s 2,00,000 1,65,000 2, 35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000

Op e ning S tock 84 ,000 84 ,000 1,05,000 2,7 3,000 1,0 8,000 1,0 8,500 1, 35,625 3,52,625Add V C ost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000

F C ost _ _ _ _ 3 5,000 35,000 35,000 1,05,000

Total Cost 2,0 4,000 2,0 4,000 2,25,000 6, 33 ,000 2,6 3,000 2,6 3,000 2,90,625 8,17,625

Le ss C S tock 84 ,000 1,05,000 84 ,000 2,7 3,000 1,0 8,000 1, 35,625 1,0 8,500 3,52,625

(B) COG S 1,20,000 99,000 1, 41,000 3,60,000 1,55,000 1,27, 875 1, 82,125 4,65,000

Contribution (A-B)c 80,000 66,000 94,000 2, 40,000 _ _ _ _

( D) F C ost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1, 35,000

(A-B)45,000 37,125 52, 875 1,35000

Comparati ve C ost S tat e m e nt


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Contribution is the d iff e r e nc e b e twee n sal e sAn d the marginal (Variabl e ) cost

Contribution =sal e s -variabl e costC= S-V

Contribution = Fixed C ost+ Profit

C= F+PThe r e for e

S-V = F+P


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Contribution is the d iff e r e nc e b e twee n sal e sAn d the marginal (Variabl e ) cost

S-V =F+P

If an y 3 factors in the e quation ar e kno w nThe 4 th coul d b e foun d out

P= S-V-FP= C-FF=C-PS =F+P+ VV=S-C .


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S al e s =Rs 12,000

V C ost= RS 7,000

F C ost= Rs 4,000

C=S-V=12,000 -7000= 5000

P= C-F

=5,000 -4000

=Rs 1,000

P ROFIT ?

S =C+V

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

S ALES ?


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S al e s =Rs 12,000

V C ost= RS 7,000

F C ost= Rs 4,000

F=C-P

=5,000 -1,000

=Rs 4,000

F C OS T?

V=S-C

=12,000 -5000=Rs 7,000

V Cost?


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Profit Volum e R atio (P V R atio)(Expr e ss e s the r e lation of Contribution to sal e s)

P/ V Ratio =Contribution = C /S =S-V /SS al e s

C = S X P/ V Ratio

CS = --------

P/ V R atio

S al e s= Rs 10,000

V C ost= Rs 8,000

P/ V Ratio=c/s=S-V /S=10,000 -8000/10,000=20%


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Profit Volum e R atio (P V R atio)

Whe n P VRatio isGive n

C= SX P V Ratio

C= 10000 X20%

=Rs 20,000


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Profit Volum e R atio (P V R atio)

Anot he r Me th o d

Ch ang e in ContributionP/ V Ratio = ---------------------------------

Ch ang e in S al e s

Ch ang e in profit= -----------------------

Ch ang e in S al e s

1600 -1000=------------------- x 10022000 -20000

600= ----------- x100= 30%

2,0000

Ye ar sal e s n e t profit

2005 20,000 1000

2006 22,000 1600


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Wh at Coul d b e the U s e s of P V R atio?

Br e ak Eve n Point

Profit at Gi ve n S al e s

Vol r e quir ed to e arn gi ve n Profit


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H o w Impro ve m e nt in P V R atio Coul d b e Ac h ieved ?

Incr e asing Se lling Pric e

Red ucing Variabl e C ost

Ch anging S al e s Mix


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Limiting Or Key F actor

a factor in s h ort suppl y


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a factor in the acti viti e s of an un de rtakingwh ic h at a point of tim e or o ve r a p e rio d

will limit the volum e of out put


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Wh at Coul d b e the Limiting Factors ?

Labour Mat e rialsPo we r

S al e sCapacit yMac h in e s .


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Cost - Volum e- Profit Anal ysis


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Br e ak Eve n Anal ysis

Profit Volum e Ch art


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A point of no profit no loss

A point whe r e r eve nu e e quals cost


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Wh at ar e BEP ---assumptions

All costs ar e fix ed or variabl eVC r e mains ConstantTotal FC r e mains ConstantSe lling Pric e d ont c h ang e W ith Volum e

Sy nc h ronisation of Pro d & S al e sNo Ch ang e in Pro d ucti vity p e r w ork e rs


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Me th o d s

Alg e braic Me th o d

Grap h ic Me th o d


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ALG EBRAICMETH ODFixed C ost

BEP (Units) = --------------- = FContribution P U S-V

Fixed C ost BEP (Rs ) = ----------------- x S al e s

Contribution

Fixed C ostBEP (Rs) = ------------------P/ V R atio


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ALG EBRAICMETH ODFixed C ost

BEP (Units) = --------------- = FContribution P U S-V

Fixed C ost BEP (Rs ) = ----------------- x S al e s

Contribution

Fixed C ostBEP (Rs) = ------------------P/ V R atio

F C ost= Rs 12000

S Pric e =Rs12 puV C ost =Rs 9 pu

Fin d BEP


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Ot he r Us e s

Profit at d iff. S al e s Vol.

S al e s at De sir ed Profit

F C ost= Rs 12000S Pric e =Rs12 puV Cost =Rs 9 pu

Profit whe n sal e s ar e

a) Rs 60,000b) Rs 1,00,000


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Ot he r Us e s


F C ost +De sir ed ProfitS al e s = -------------------------------

P/ V Ratio


S al e s if de sir ed profita) Rs 6000b) Rs 15,000


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F C ost +De sir ed ProfitS al e s = -------------------------------

P/ V Ratio

12,000+6000

a) S al e s= ---------------25%

=Rs 72,000


S al e s if de sir ed profita) Rs 6000b) Rs 15,000


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CVP Anal ysis -qu e stion

P ltd h as e arn ed a profit of Rs 1. 80 lak h on sal e s of

Rs 30 lak h s an d V C ost of Rs 21 lak h s.w ork out

a)B EPb)B EP Whe n V C ost de cr e as e s b y5% c)B EP at pr e s e nt leve l whe n s e lling pric e r ed uc ed b y5%


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CVP Anal ysis -qu e stion

b) Whe n V C ost incr e as e s b y 5%

New V ariabl e C ost=2100000+5%=22,05,000

P V Ratio 3000000 -22050003000000

=26.5%

BEP =7,20,000/ 26.5%

=Rs 27,16,9 81


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Break-Even Analysis

Costs/Revenue

Output/Sales

Initially a firmwill incur fixedcosts, these donot depend onoutput or sales .

FC

Q1

B k E A l i


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Break-Even Analysis

Costs/Revenue

Output/Sales

Initially a firmwill incur fixedcosts, these donot depend onoutput or sales.

FC

As output isgenerated, thefirm will incur variable costs these varydirectly with theamount produced

VCThe total coststherefore(assumingaccurateforecasts!) is thesum of FC+VC

TC

Total revenue is

determined by the price charged andthe quantity sold again this will bedetermined byexpected forecastsales initially.

TR The lower the

price, the lesssteep the totalrevenue curve.

TR

Q1

The Break-even pointoccurs where totalrevenue equals totalcosts the firm, inthis example wouldhave to sell Q1 togenerate sufficientrevenue to cover its

costs.


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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR

Q1

If the firm choseto set price higher than Rs2 (sayRs3) the TR curvewould be steeper they would nothave to sell asmany units to

break even

TR

Q2


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Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR

Q1

If the firm choseto set prices lower it would need tosell more units

before covering itscosts

TR)

Q3


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High initial FC.


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Costs/Revenue

Output/Sales

FC

VCTR

gInterest on debtrises each year FCrise therefore

FC 1

Losses get

bigger !

B k E A l i


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Break-Even Analysis

Remember :A higher price or lower price does notmean that break even will n eve r bereached!

The BE point depends on the sales

needed to generate revenue to cover costs


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Break-Even Analysis

Importance of Pric e E lasticit y of De man d :

H ig he r pric e s might mean fewer sales to break-

even

Lo we r pric e s might encourage more customersbut higher volume needed before sufficient

revenue generated to break-even


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Break-Even Analysis

Links of BE to pricing strat e gi e s an de lasticit y

Penetration pricing high volume, low price more sales to break even


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Break-Even Analysis


Market Skimming high price low volumes fewer sales to break even


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Break-Even Analysis


Elasticity what is likely to happen to saleswhen prices are increased or decreased?


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Marginal CostingCost Volum e Ch art


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Construction Of P V Ch art

1 s e le ct a scal e on H orizontal axis ---sal e s

2 Se le ct a scal e on Ve rtical axis - FC & Profit

3 Plot FC & Profit

4 Diagonal lin e cross e s sal e s lin e at BEP


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P V Ch art Information

Fixed C ost =Rs 5000S al e s =Rs 20000(pu RS 20)V Cost= Rs 10000(pu Rs10)

Fin d

P V Ratio, BEP, Profit?


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0 5000 10000 15000 20000S al e s Rs

Fixed C ostRs

2000

400050006000

8000

8000

600050004000

2000

ProfitRs

BEP


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0 5000 10000 15000 20000S al e s Rs

Fixed C ostRs

2000

400050006000

8000

8000

600050004000

2000

ProfitRs

BEP

LossAr e a

ProfitAr e a

--------------------------Margin of S af e ty


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Eff e ct Of Ch ang e in Profit - 20% de cr e as e in fixed C ost

New F C ost= 5000 - 20%= Rs 4000

Fixed C ostNew BEP = P V Ratio

= 4000/50%

=Rs 8000New Profit= S-F-V=20000 -4000 -10000=Rs 6000


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Eff e ct of Ch ang e in profit - 20% de cr e as e in FC

0 5000 10000 15000 20000S al e s Rs

Fixed C ostRs

2000

400050006000

8000

ProfitRs

BEP

LossAr e a

ProfitAr e a

80006000

50004000

2000


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Eff e ct Of Ch ang e in Profit - 10% de cr e as e in V Cost

New V C ost= 10000 - 10%= Rs9000New P V R atio=20000 -9000

20000

Fixed C ostNew BEP = P V Ratio

= 5000/55%

=Rs 9090 AppxNew Profit= S-F-V=20000 -5000 -9000=Rs 6000

=55%


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0 5000 10000 15000 20000S al e s Rs

Fixed C ostRs

2000

400050006000

8000

80006000

50004000

2000

ProfitRs

New BEP

LossAr e a

ProfitAr e a


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4089958 marginal costing

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