marginal costing

80
marginal costing

Upload: paramjit-sharma

Post on 13-Nov-2014

61 views

Category:

Documents


7 download

DESCRIPTION

Marginal costing and decison making

TRANSCRIPT

Page 1: Marginal Costing

marginal costing

Page 2: Marginal Costing

Why do we study Marginal Costing?

Page 3: Marginal Costing

What do we study in Marginal Costing?

Marginal CostMarginal CostingDirect CostingAbsorption CostingContributionProfit Volume AnalysisLimiting Factor/key factorBreak Even AnalysisProfit Volume Chart

Page 4: Marginal Costing

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

Page 5: Marginal Costing

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”

Page 6: Marginal Costing

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

Page 7: Marginal Costing

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””

Page 8: Marginal Costing

Marginal Costing

What Could be effects ofWhat Could be effects ofChangesChanges

In volume In volume or or Type of outputType of output

Page 9: Marginal Costing

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

Page 10: Marginal Costing

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

Page 11: Marginal Costing

Marginal Costing ---Characteristics

Fixed & VariableCosts

MC Costs asProducts Costs

Fixed Costs asPeriod Costs

InventoryValuation

Contribution

Pricing

Marginal Costing&

Profit

Page 12: Marginal Costing

Marginal Costing ---Characteristics

SegregationFixed & Variable

Costs

Semi-variable costsare segregated

into fixed &variable

Semi-variable costsare segregated

into fixed &variable

Page 13: Marginal Costing

Marginal Costing ---Characteristics

Marginal Costs as

Products Costs

Only Variable costsare chargedto products

Only Variable costsare chargedto products

Page 14: Marginal Costing

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

Page 15: Marginal Costing

Marginal Costing ---Characteristics

InventoryValuation

WIP & F goods areValued at

Marginal Cost

WIP & F goods areValued at

Marginal Cost

Page 16: Marginal Costing

Marginal Costing ---Characteristics

ContributionS-V=C

Profitability judged onContribution made

S-V=C

Profitability judged onContribution made

Page 17: Marginal Costing

Marginal Costing ---Characteristics

Pricing

Pricing is based onContribution &Marginal Costs

Pricing is based onContribution &Marginal Costs

Page 18: Marginal Costing

Marginal Costing ---Characteristics

Marginal Costing&

Profit

A B C Total

Sales - - - ----Less VC - - - ----

Contribution - - - ----

Fixed Cost ----

Profit -----

Page 19: Marginal Costing

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

Page 20: Marginal Costing

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.

Page 21: Marginal Costing

Absorption-Marginal Costing--differences

Fixed &Variable

Costs

MeasurementOf

ProfitabilityValuationOf stock

Page 22: Marginal Costing

Absorption-Marginal Costing--differences

Fixed &Variable

Costs

Marginal Costing

Only variable cost

FC charged to P/L

Absorption Costing

Both F & V CostsAre charged

Page 23: Marginal Costing

Absorption-Marginal Costing--differences

ValuationOf stock

WIP & FSat

MarginalCost

Total Cost

Page 24: Marginal Costing

Absorption-Marginal Costing--differences

MeasurementOf

Profitability

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

Page 25: Marginal Costing

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

Page 26: Marginal Costing

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

Page 27: Marginal Costing

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

Page 28: Marginal Costing

Concept Of Contribution

Page 29: Marginal Costing

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

Page 30: Marginal Costing

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……….

Page 31: Marginal Costing

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?

Page 32: Marginal Costing

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?

Page 33: Marginal Costing

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%

Page 34: Marginal Costing

Profit –Volume Ratio (PV Ratio)

When PV Ratio isGiven

C= SXPV Ratio

C= 10000X20% =Rs 20,000

Page 35: Marginal Costing

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

Page 36: Marginal Costing

What Could be the Uses of PV Ratio?

Break Even Point

Profit at Given Sales

Vol required to earn given Profit

Page 37: Marginal Costing

How Improvement in PV Ratio Could be Achieved?

Increasing Selling Price

Reducing Variable Cost

Changing Sales Mix

Page 38: Marginal Costing

Limiting Or Key Factor

a factor in short supply

Page 39: Marginal Costing

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

Page 40: Marginal Costing

Limiting Or Key Factor

What Could be the Limiting Factors ?

LabourMaterialsPowerSalesCapacityMachines………….

Page 41: Marginal Costing

Cost- Volume- Profit Analysis

Page 42: Marginal Costing

Cost- Volume- Profit Analysis

Cost Of Production

Selling Prices

Volume Produced /Sold

Page 43: Marginal Costing

Cost- Volume- Profit Analysis

Break Even Analysis

Profit Volume Chart

Page 44: Marginal Costing

Cost- Volume- Profit Analysis

Break Even Analysis

A point of no profit no loss

A point where revenue equals cost

Page 45: Marginal Costing

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

Page 46: Marginal Costing

Cost- Volume- Profit Analysis

Break Even Analysis

Methods

Algebraic Method

Graphic Method

Page 47: Marginal Costing

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

Page 48: Marginal Costing

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

Page 49: Marginal Costing

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

Page 50: Marginal Costing

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

Page 51: Marginal Costing

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

Page 52: Marginal Costing

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

Page 53: Marginal Costing

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%

Page 54: Marginal Costing

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

Page 55: Marginal Costing

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

Page 56: Marginal Costing

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)

Page 57: Marginal Costing

BEP

Graphical Presentation

Page 58: Marginal Costing

Break-Even Analysis

Costs/Revenue

Output/Sales

Initially a firm will incur fixed costs, these do not depend on output or sales.

FC

Q1

Page 59: Marginal Costing

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.

Page 60: Marginal Costing

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

Page 61: Marginal Costing

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

Page 62: Marginal Costing

Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VC

TCTR

Q1

Loss

Profit

Page 63: Marginal Costing

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

Page 64: Marginal Costing

Costs/Revenue

Output/Sales

FC

VC

TR

High initial FC. Interest on debt rises each year – FC rise therefore

FC 1

Losses get bigger!

Page 65: Marginal Costing

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

Page 66: Marginal Costing

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

Page 67: Marginal Costing

Break-Even Analysis

• Links of BE to pricing strategies and elasticity

• Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even

Page 68: Marginal Costing

Break-Even Analysis

• Links of BE to pricing strategies and elasticity

• Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even

Page 69: Marginal Costing

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?

Page 70: Marginal Costing

Marginal CostingCost Volume Chart

Page 71: Marginal Costing

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

Page 72: Marginal Costing

PV Chart Information

Fixed Cost =Rs 5000Sales =Rs 20000(pu RS 20)V Cost= Rs 10000(pu Rs10)

Find PV Ratio, BEP, Profit?

Page 73: Marginal Costing

Construction Of PV Chart

0 5000 10000 15000 20000 Sales Rs

Fixed Cost Rs

2000

400050006000

8000

8000

600050004000

2000

ProfitRs

BEP

Page 74: Marginal Costing

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

Page 75: Marginal Costing

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

Page 76: Marginal Costing

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

Page 77: Marginal Costing

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%

Page 78: Marginal Costing

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

Page 79: Marginal Costing
Page 80: Marginal Costing

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