45751727-marginal-costing.ppt

8/11/2019 45751727-Marginal-Costing.ppt

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Marginal Costing and Absorption

Costing There are mainly two techniques of determining cost

and profit:-

Marginal CostingAbsorption Costing

These are not methods of costing like job costing orprocess costing.


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Marginal Costing: CIMA defines marginal costing as the accounting

system in which variable costs are charged to the costunits and fixed costs of the period are written-off infull against the aggregate contribution.


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ABSORPTION COSTING Absorption costing is a costing technique, which does

not recognise the difference between fixed costs andvariable costs, all the manufacturing costs areabsorbed in the cost of the products produced.

Absorption costing is a traditional approach and is alsoknown as Conventional Costing.


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Characteristics of Marginal Costing Segregation of Costs into fixed and variable elements.

Marginal Costs as products costs.

Fixed costs as period costs.Valuation of inventory(on the basis of variable

manufacturing cost only)

Contribution (sales variable cost ).


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Variable CostsVariable costsare costs such as raw materials, direct

labor, direct expenses and energy, commission on salesunits etc, that vary or change directly with the amountof product produced and sold.


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Differences between Marginal

Costing and Absorption Costing Marginal costing differs from absorption costing on

the ground of difference in valuation of closing stock.Marginal costing techniques values closing stock atmarginal cost where as it is valued at total cost ofproduction in absorption costing techniques.


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Uses of Marginal Costing in

Decision making: Helps in Fixation of selling price

Helps in selecting a suitable produce mix formaximum profit.

Determining Break Even point.

Choosing from the available alternative method ofproduction the one which gives highest contribution orcontribution per limiting factor.

Make or buy decision on the basis of highercontribution

Taking a decision as regard to adding a new product inthe market.


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Decisions Based on

Marginal Costing To plan their operations, manufacturing firms must

decide:

How many units they expect to sell

How many units to produce

How much to spend to produce and sell these units

At what price they must sell the units to make the profit

they want To make these decisions, firms may calculate the

break-even point.


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Break-Even Point The break-even pointis the point at which income

from sales equals the total cost of producing andselling goods.

It is the point at which the business will neither make aprofit nor suffer a loss.

When sales exceed the break-even point, there is aprofit.

When sales are less than the break-even point, there isa loss.


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Finding the Break-Even Point To find the break-even point, you need to know three

things:

Fixed costs for manufacturing the product

Variable costs for manufacturing each unit of theproduct

Expected selling price of each unit of the product


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Break-Even Point in Sales Rs

Break-Even Point in Rs.

=Break-Even Point in Units Sales Price per Unit

or

Fixed costP/V ratio


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Break Even point in units Break Even point in units

= Fixed CostContribution per unit


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Marginal cost equationS V = F P

Where S = Sales V = Variable costF = Fixed cost P = profit


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Break-Even (or cost volume profit)

Analysis

It establishes the relationship of costs, volume and

profit in broader sense break even analysis is onewhich determines the profit earned at any point orlevel of output. In narrow sense it is to determine thebreak even point (no-profit, no-loss) from whereprofits accrue.


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Contribution and P/V ratioContribution

- The amount contributed towards fixedexpenses and profit i.e., sales less variable cost.

Profit / Volume ratio (P/V Ratio)

- Studies the profitability of operations of a

business and establishes the relationship betweencontribution and sales.


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To improve the P/V- Reduce variable costs

- Increase the selling price- Produce products having higher P/V ratio


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Margin of Safety It is the level of sale over and above the break even

point.MoS = Sales - BEP

Percentage of Margin of Safety

= (Expected Sales BEP sales) x 100

Expected sales


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decrease in selling price results in Reduction in sales volume

Reduction in contribution

Reduction in P/V ratio Increase in break-even sales volume

Shortening of margin of safety


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Sensitivity Analysis CVP provides structure to answer a variety of what-

if scenarios

What happens to profit if:

Selling price changes

Volume changes

Cost structure changes

Variable cost per unit changes Fixed cost changes


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List of Formulae:

1) Variable expenses per unit

= change in costchange in output

2) Marginal cost equation

Sales Variable Cost = Fixed cost profit /loss

3) Contribution = Sales variable cost.

4) P/V ratio = contribution ( x 100 for percentage)

sales


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Continue5) Variable Cost = Sales x (1- P/V ratio)

6) Profit = (Sales x P/V ratio) Fixed cost

7) Sales to earn desired profit =Fixed expenses + Desired profit

Selling price per unit Variable cost per unit


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Continue8) Margin of safety = Actual sales Break Even sales

or profit

P/V ratio9) % of Margin of safety

= (Expected sales BEP sales) x 100

Expected sales

10) P/V ratio =

change in profit ( x 100 for %)

change in sales


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Break Even Chart:

It provides pictorial view of the relationshipbetween costs, volume & profit, it shows the Breakeven points and also indicates the estimated profit/ loss at various levels of output. Break Evenchart is a point at which the total cost line and thetotal sales line intersect.

Profit volume chart:

It represent profit volume relationship, it showsprofit/loss at different volumes of sales


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Fixed cost : $2000, variable cost : $120 per unit , selling price per unit ; $200

$10,000 y

$8,000

$6,000

$5,000

$4,000

$2,000

Dollars

10 20 25 30 40 50

x

Units Sold

Operating income

area

Breakeven point

= 25 units

Total

costs

line

Operatin

g lossarea

Operatingincome

Variable

cost

Fixed

cost

Ma

rgi

n

of

saf

ety

Margin of safety


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The Seattle Contemporary Theater is a newly formed nonprofit enterprise. The theatres

business manager Andrew Lloyd has, made the following projections for the first fewyears of operation;

Fixed expenses per month:

Theatre rental $ 10000

employees salaries and fringe benefits 8000

Actors Wages(to be supplemented with local volunteer talent) 15000Production crews wages 5600

(to be supplemented with local volunteers)

Playwrights royalties for use of plays 5000

Insurance 1000

Utilitiesfixed portion 1400

Advertising expenses 800

Administrative expenses 1200

Total fixed expenses per month $ 48000


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Variable expenses per ticket sold:

Citys charge per ticket for use of theater $ 8

Other miscellaneous expenses (for example, pricing of

playbills and tickets, variable portion of utilities) 2Total variable cost per ticket sold $ 10

Revenue:

Price per ticket $ 16


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Find the break even point in tickets;

Find the break even point in Rs;

Find out the profit or loss if only 6000 tickets are sold;

The board of trustees for Seattle Theater would like to run free workshops andclasses for young actors and aspiring playwrights. This programme would cost $3600 per month in fixed expenses, no variable expenses would be incurred.How many theatre tickets must be sold to earn a profit of $ 3600.

What would happen to the break even point if fixed utilities expenses prove tobe $ 2600 instead of $ 1400.

Suppose that various people pledge donations amounting to $ 6000 per month,what would be the Break Even point ?

What would happen to the Break even point in miscellaneous variableexpenses incur to be $ 3 per ticket instead of $ 2.

What would have the effect on BEP if ticket price is raised to $ 18


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Now suppose that the city of Seattle has agreed to refurbish 10 theaterboxes in the historic theatre building. Each box has five seats, which aremore comfortable and affaord a better view of the stage than thetheaters general seating. The board of trustees has decided to charge $

16 per ticket for general seating and $ 20 per ticket for box seats.

Seat type seats in theater seats availableper month(20 performances)

Regular 450 9000

Box 50 1000

45751727-marginal-costing.ppt

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