marginal costing
DESCRIPTION
Marginal costing and decison makingTRANSCRIPT
marginal costing
Why do we study Marginal Costing?
What do we study in Marginal Costing?
Marginal CostMarginal CostingDirect CostingAbsorption CostingContributionProfit Volume AnalysisLimiting Factor/key factorBreak Even AnalysisProfit Volume Chart
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
Marginal Cost
“Marginal cost is amount at any given volume of out put by which aggregate costs are changed…..
if volume of output is increased or decreased by one unit”
Marginal Cost
“Marginal cost is amount at any given volume of out put by which aggregate costs are changed if volume of output is increased or decreased by one unit”
1 Manufacture 100 radioVariable costs Rs150 p uFixed 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
Marginal Costing
“marginal costing is ascertainment ofmarginal costing is ascertainment ofmarginal cost by differentiating betweenmarginal cost by differentiating betweenfixedfixed and and variablevariable costs costs
and of the and of the effecteffectof of changes in volumechanges in volume or type of output or type of output””
Marginal Costing
What Could be effects ofWhat Could be effects ofChangesChanges
In volume In volume or or Type of outputType of output
Marginal Costing
What Could be effects ofWhat Could be effects ofChangesChanges
In volume In volume or or Type of outputType of output
1 lakh unitsTo
2 lakh units
Marginal Costing
What Could be effects ofWhat Could be effects ofChangesChanges
In volume In volume or or Type of outputType of output
From OneModel of
Car toAnother
From OneSize of
product toanother
Marginal Costing ---Characteristics
Fixed & VariableCosts
MC Costs asProducts Costs
Fixed Costs asPeriod Costs
InventoryValuation
Contribution
Pricing
Marginal Costing&
Profit
Marginal Costing ---Characteristics
SegregationFixed & Variable
Costs
Semi-variable costsare segregated
into fixed &variable
Semi-variable costsare segregated
into fixed &variable
Marginal Costing ---Characteristics
Marginal Costs as
Products Costs
Only Variable costsare chargedto products
Only Variable costsare chargedto products
Marginal Costing ---Characteristics
Fixed Costs asPeriod Costs
Fixed costs treatedPeriod costs
Charged to costingP & L Account
Fixed costs treatedPeriod costs
Charged to costingP & L Account
Marginal Costing ---Characteristics
InventoryValuation
WIP & F goods areValued at
Marginal Cost
WIP & F goods areValued at
Marginal Cost
Marginal Costing ---Characteristics
ContributionS-V=C
Profitability judged onContribution made
S-V=C
Profitability judged onContribution made
Marginal Costing ---Characteristics
Pricing
Pricing is based onContribution &Marginal Costs
Pricing is based onContribution &Marginal Costs
Marginal Costing ---Characteristics
Marginal Costing&
Profit
A B C Total
Sales - - - ----Less VC - - - ----
Contribution - - - ----
Fixed Cost ----
Profit -----
Marginal Costing --- Marginal Costing Profit
Sales of A
Marginal costOf A
Contribution of A
TotalContribution of
A,B& C
Total FixedCost
Sales of B
Marginal costOf B
Contribution of B
Sales of C
Marginal costOf C
Contribution of C
less
=
less less
= =
less
= Profit/loss
Absorption Costing
“Absorption cost is a total cost technique Absorption cost is a total cost technique Under which total cost ie Under which total cost ie fixed & variablefixed & variableis charged to production.is charged to production. Inventory is also valued at total cost. Inventory is also valued at total cost.
Absorption-Marginal Costing--differences
Fixed &Variable
Costs
MeasurementOf
ProfitabilityValuationOf stock
Absorption-Marginal Costing--differences
Fixed &Variable
Costs
Marginal Costing
Only variable cost
FC charged to P/L
Absorption Costing
Both F & V CostsAre charged
Absorption-Marginal Costing--differences
ValuationOf stock
WIP & FSat
MarginalCost
Total Cost
Absorption-Marginal Costing--differences
MeasurementOf
Profitability
C=S-V P=S-V-F
Marginal Costing
Months1 2 3 Total Rs Rs Rs Rs
Absorption Costing
Months1 2 3 Total Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000 F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 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 Cost 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
Comparative Cost Statement
Marginal Costing
Months1 2 3 Total Rs Rs Rs Rs
Absorption Costing
Months1 2 3 Total Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000 F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 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 Cost 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
Comparative Cost Statement
Marginal Costing
Months1 2 3 Total Rs Rs Rs Rs
Absorption Costing
Months1 2 3 Total Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000 F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 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 Cost 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
Comparative Cost Statement
Concept Of Contribution
Contribution is the difference between salesAnd the marginal (Variable) cost
Contribution =sales-variable cost C= S-VContribution = Fixed Cost+ Profit C= F+PTherefore
S-V = F+P
Contribution is the difference between salesAnd the marginal (Variable) cost
S-V=F+P
If any 3 factors in the equation are knownThe 4th could be found out
P=S-V-F P=C-F F=C-P S=F+P+V V=S-C……….
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?
Sales =Rs 12,000
V Cost=RS 7,000
F Cost=Rs 4,000
F=C-P
=5,000-1,000 =Rs 4,000
F COST?
V=S-C
=12,000-5000 =Rs 7,000
V Cost?
Profit –Volume 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 C S = -------- 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%
Profit –Volume Ratio (PV Ratio)
When PV Ratio isGiven
C= SXPV Ratio
C= 10000X20% =Rs 20,000
Profit –Volume Ratio (PV Ratio)
Another Method
Change in ContributionP/V Ratio = --------------------------------- Change in Sales
Change in profit = ----------------------- Change in Sales
1600-1000 =-------------------x 100 22000-20000
600 = -----------x100=30% 2,0000
Year sales net profit
2005 20,000 1000
2006 22,000 1600
What Could be the Uses of PV Ratio?
Break Even Point
Profit at Given Sales
Vol required to earn given Profit
How Improvement in PV Ratio Could be Achieved?
Increasing Selling Price
Reducing Variable Cost
Changing Sales Mix
Limiting Or Key Factor
a factor in short supply
Limiting Or Key Factor
a factor in the activities of an undertakingwhich at a point of time or over a period
will limit the volume of out put
Limiting Or Key Factor
What Could be the Limiting Factors ?
LabourMaterialsPowerSalesCapacityMachines………….
Cost- Volume- Profit Analysis
Cost- Volume- Profit Analysis
Cost Of Production
Selling Prices
Volume Produced /Sold
Cost- Volume- Profit Analysis
Break Even Analysis
Profit Volume Chart
Cost- Volume- Profit Analysis
Break Even Analysis
A point of no profit no loss
A point where revenue equals cost
What are BEP---assumptions
All costs are fixed or variableVC remains ConstantTotal FC remains ConstantSelling Price don’t change With VolumeSynchronisation of Prod & Sales No Change in Productivity per workers
Cost- Volume- Profit Analysis
Break Even Analysis
Methods
Algebraic Method
Graphic Method
Cost- Volume- Profit Analysis ALGEBRAIC
METHOD Fixed Cost BEP (Units) = --------------- = F Contribution PU S-V
Fixed Cost BEP (Rs ) = ----------------- x Sales Contribution
Fixed Cost BEP (Rs) = ------------------ P/V Ratio
Cost- Volume- Profit Analysis ALGEBRAIC
METHOD Fixed Cost BEP (Units) = --------------- = F Contribution PU S-V
Fixed Cost BEP (Rs ) = ----------------- x Sales Contribution
Fixed Cost BEP (Rs) = ------------------ P/V Ratio
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Find BEP
Cost- Volume- Profit Analysis
Other Uses
Profit at diff. Sales Vol.
Sales at Desired Profit
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Profit when sales are
a) Rs 60,000b) Rs 1,00,000
Cost- Volume- Profit Analysis
Profit at diff. Sales Vol.
CP/V Ratio= ----- = 3/12=25% S
WHEN SALES=Rs 60,000
contribution=salesxp/vratio =60000x25% =Rs 15000Profit =contribution-fixed cost =15000-12000 =Rs3000
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Profit when sales are
a) Rs 60,000b) Rs 1,00,000
Cost- Volume- Profit Analysis
Other Uses
Sales at Desired Profit
F Cost +Desired ProfitSales= ------------------------------- P/V Ratio
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Sales if desired profita) Rs 6000b) Rs 15,000
Cost- Volume- Profit Analysis
Sales at Desired Profit
F Cost +Desired ProfitSales= ------------------------------- P/V Ratio
12,000+6000a)Sales= --------------- 25%
=Rs 72,000
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Sales if desired profita) Rs 6000b) Rs 15,000
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%
CVP Analysis -
S-VP/V Ratio=-------- S 3000000-2100000 = ------------------------ 3000000 =30%Sales =VC+FC+P3000000=2100000+FC+180000 FC =Rs 720000 7,20,000 BEP= ------------- 30%
=Rs 2400000
CVP Analysis -question
b) When V Cost increases by 5%
New Variable Cost=2100000+5% =22,05,000
PV Ratio 3000000-2205000 3000000 =26.5%
BEP =7,20,000/ 26.5%
=Rs 27,16,981
CVP Analysis -question
c)When Selling Price reduced by 5%
New SP=3000000—5% =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)
BEP
Graphical Presentation
Break-Even Analysis
Costs/Revenue
Output/Sales
Initially a firm will incur fixed costs, these do not depend on output or sales.
FC
Q1
Break-Even Analysis
Costs/Revenue
Output/Sales
Initially a firm will incur fixed costs, these do not depend on output or sales.
FC
As output is generated, the firm will incur variable costs – these vary directly with the amount produced
VC
The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC
TC
Total revenue is determined by the price charged and the quantity sold – again this will be determined by expected forecast sales initially.
TRThe lower the price, the less steep the total revenue curve.
TR
Q1
The Break-even point occurs where total revenue equals total costs – the firm, in this example would have to sell Q1 to generate sufficient revenue to cover its costs.
Break-Even Analysis
Costs/Revenue
Output/Sales
FC
VCTCTR
Q1
If the firm chose to set price higher than Rs2 (say Rs3) the TR curve would be steeper – they would not have to sell as many units to break even
TR
Q2
Break-Even Analysis
Costs/Revenue
Output/Sales
FC
VCTCTR
Q1
If the firm chose to set prices lower it would need to sell more units before covering its costs
TR)
Q3
Break-Even Analysis
Costs/Revenue
Output/Sales
FC
VC
TCTR
Q1
Loss
Profit
Break-Even Analysis
Costs/Revenue
Output/Sales
FC
VC
TCTR
Q1 Q2
Assume current sales at Q2
Margin of Safety
Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made
TR
Q3
A higher price would lower the break even point and the margin of safety would widen
Costs/Revenue
Output/Sales
FC
VC
TR
High initial FC. Interest on debt rises each year – FC rise therefore
FC 1
Losses get bigger!
Break-Even Analysis
• Remember:• A higher price or lower price does not
mean that break even will never be reached!
• The BE point depends on the sales
needed to generate revenue to cover costs
Break-Even Analysis
• Importance of Price Elasticity of Demand:
• Higher prices might mean fewer sales to break-even
• Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even
Break-Even Analysis
• Links of BE to pricing strategies and elasticity
• Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even
Break-Even Analysis
• Links of BE to pricing strategies and elasticity
• Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even
Break-Even Analysis
• Links of BE to pricing strategies and elasticity
• Elasticity – what is likely to happen to sales when prices are increased or decreased?
Marginal CostingCost Volume Chart
Construction Of PV Chart
1 select a scale on Horizontal axis---sales
2 Select a scale on Vertical axis- FC & Profit
3 Plot FC & Profit
4 Diagonal line crosses sales line at BEP
PV Chart Information
Fixed Cost =Rs 5000Sales =Rs 20000(pu RS 20)V Cost= Rs 10000(pu Rs10)
Find PV Ratio, BEP, Profit?
Construction Of PV Chart
0 5000 10000 15000 20000 Sales Rs
Fixed Cost Rs
2000
400050006000
8000
8000
600050004000
2000
ProfitRs
BEP
Construction Of PV Chart
0 5000 10000 15000 20000 Sales Rs
Fixed Cost Rs
2000
400050006000
8000
8000
600050004000
2000
ProfitRs
BEP
LossArea
ProfitArea
--------------------------Margin of Safety
Effect Of Change in Profit- 20% decrease in fixed Cost
New F Cost= 5000- 20%=Rs4000
Fixed CostNew BEP = PV Ratio = 4000/50% =Rs 8000New Profit=S-F-V =20000-4000-10000 =Rs 6000
Effect of Change in profit- 20% decrease in FC
0 5000 10000 15000 20000 Sales Rs
Fixed Cost Rs
2000
400050006000
8000
ProfitRs
BEP
LossArea
ProfitArea
80006000
50004000
2000
Effect Of Change in Profit- 10% decrease in V Cost
New V Cost= 10000- 10%=Rs9000New PV Ratio=20000-9000 20000
Fixed CostNew BEP = PV Ratio = 5000/55% =Rs 9090 AppxNew Profit=S-F-V =20000-5000-9000 =Rs 6000
=55%
Construction Of PV Chart
0 5000 10000 15000 20000 Sales Rs
Fixed Cost Rs
2000
400050006000
8000
80006000
50004000
2000
ProfitRs
New BEP
LossArea
ProfitArea
Effect Of 5% Decrease in Selling Price
0 5000 10000 15000 20000 Sales Rs
Fixed Cost Rs
2000
400050006000
8000
80006000
50004000
2000
ProfitRs
New BEP
LossArea
ProfitArea