m arginal c osting

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 ChartManagementDecisionMaking

Marginal CostMarginal 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 CostMarginal 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 unit1 Manufacture 100 radioVariable costs Rs150 p uFixed cost Rs 50002 If Manufacture 101 radiosMarginal Cost 100 x150= 15000Fixed Cost = 5000 total 20000Marginal cost 150 x101=15150Fixed Cost = 5000TOTAL 20150 12additional Cost=Rs 150

Marginal Costingmarginal costing is ascertainment ofmarginal cost by differentiating betweenfixed and variable costs

and of the effectof changes in volume or type of output

Marginal CostingWhat Could be effects ofChanges

In volume or Type of output


In volume or Type of output1 lakh unitsTo2 lakh units


In volume or Type of outputFrom OneModel ofCar toAnotherFrom OneSize ofproduct toanother

Marginal Costing ---CharacteristicsFixed & VariableCostsMC Costs asProducts CostsFixed Costs asPeriod CostsInventoryValuationContributionPricingMarginal Costing&Profit

Marginal Costing ---CharacteristicsSegregationFixed & VariableCostsSemi-variable costsare segregatedinto fixed &variable

Marginal Costing ---CharacteristicsMarginal Costs asProducts CostsOnly Variable costsare chargedto products

Marginal Costing ---CharacteristicsFixed Costs asPeriod CostsFixed costs treatedPeriod costsCharged to costingP & L Account

Marginal Costing ---CharacteristicsInventoryValuationWIP & F goods areValued atMarginal Cost

Marginal Costing ---CharacteristicsContributionS-V=C

Profitability judged onContribution made

Marginal Costing ---CharacteristicsPricingPricing is based onContribution &Marginal Costs

Marginal Costing ---CharacteristicsMarginal Costing&Profit

A B C Total

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

Contribution - - - ----

Fixed Cost ----

Profit -----

Marginal Costing ---Marginal Costing ProfitSales of AMarginal costOf AContribution of ATotalContribution ofA,B& CTotal FixedCostSales of BMarginal costOf BContribution of BSales of CMarginal costOf CContribution of Cless=lessless==less=Profit/loss

Absorption CostingAbsorption cost is a total cost technique Under which total cost i.e. fixed & variableis charged to production. Inventory is also valued at total cost.

Absorption-Marginal Costing--differencesFixed &VariableCostsMeasurementOfProfitabilityValuationOf stock

Absorption-Marginal Costing--differencesFixed &VariableCostsMarginal Costing

Only variable cost

FC charged to P/LAbsorption Costing

Both F & V CostsAre charged

Absorption-Marginal Costing--differencesValuationOf stockWIP & FSat MarginalCostTotal Cost

Absorption-Marginal Costing--differencesMeasurementOfProfitabilityC=S-VP=S-V-F

Marginal Costing

Months 2 3 Total Rs Rs Rs RsAbsorption Costing

Months 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

Months 2 3 Total Rs Rs Rs RsAbsorption Costing

Months 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) costContribution =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 4,000C=S-V =12,000-7000=5000

P=C-F

=5,000-4000

=Rs 1,000PROFIT ?S=C+V

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

Sales =Rs 12,000

V Cost=RS 7,000

F Cost=Rs 4,000F=C-P

=5,000-1,000 =Rs 4,000F 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 8,000P/V Ratio=c/s=S-V/S=10,000-8000/10,000=20%

Profit Volume Ratio (PV Ratio)When PV Ratio isGivenC= 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

20,000 1000

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 Factora factor in short supply

Limiting Or Key Factora 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 FactorWhat Could be the Limiting Factors ?LabourMaterialsPowerSalesCapacityMachines.

Cost- Volume- Profit Analysis

Cost- Volume- Profit AnalysisCost Of Production

Selling Prices

Volume Produced /Sold

Cost- Volume- Profit AnalysisBreak Even Analysis

Profit Volume Chart


A point of no profit no loss

A point where revenue equals cost

What are BEP---assumptionsAll costs are fixed or variableVC remains ConstantTotal FC remains ConstantSelling Price dont change With VolumeSynchronisation of Prod & Sales No Change in Productivity per workers


Methods

Algebraic Method

Graphic Method

Cost- Volume- Profit AnalysisALGEBRAICMETHOD 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 AnalysisALGEBRAICMETHOD 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 ProfitF Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu

Profit when sales are

Rs 60,000Rs 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 =Rs3000F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu

Profit when sales are

Rs 60,000Rs 1,00,000

Cost- Volume- Profit Analysis Other Uses

Sales at Desired Profit

F Cost +Desired ProfitSales= ------------------------------- P/V RatioF Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu

Sales if desired profitRs 6000Rs 15,000

Cost- Volume- Profit Analysis Sales at Desired Profit

F Cost +Desired ProfitSales= ------------------------------- P/V Ratio

12,000+6000a)Sales= --------------- 25%

=Rs 72,000F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu

Sales if desired profitRs 6000Rs 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=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)

BEP

Graphical Presentation

Break-Even AnalysisCosts/RevenueOutput/SalesInitially a firm will incur fixed costs, these do not depend on output or sales.FCQ1

Break-Even AnalysisCosts/RevenueOutput/SalesInitially a firm will incur fixed costs, these do not depend on output or sales.FCAs output is generated, the firm will incur variable costs these vary directly with the amount producedVCThe total costs therefore (assuming accurate forecasts!) is the sum of FC+VCTCTotal 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.TRQ1The 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 AnalysisCosts/RevenueOutput/SalesFCVCTCTR Q1If 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 evenTR Q2

Break-Even AnalysisCosts/RevenueOutput/SalesFCVCTCTR Q1If the firm chose to set prices lower it would need to sell more units before covering its costsTR)Q3

Break-Even AnalysisCosts/RevenueOutput/SalesFCVCTCTR Q1LossProfit

Break-Even AnalysisCosts/RevenueOutput/SalesFCVCTCTR Q1Q2Assume current sales at Q2Margin of SafetyMargin 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 madeTRQ3A higher price would lower the break even point and the margin of safety would widen

Costs/RevenueOutput/SalesFCVCTRHigh initial FC. Interest on debt rises each year FC rise thereforeFC 1Losses get bigger!

Break-Even AnalysisRemember: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 AnalysisImportance 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 AnalysisLinks of BE to pricing strategies and elasticity

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


Market Skimming high price low volumes fewer sales to break even


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

Marginal CostingCost Volume Chart

Construction Of PV Chart1 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 InformationFixed Cost =Rs 5000Sales =Rs 20000(pu RS 20)V Cost= Rs 10000(pu Rs10)

Find PV Ratio, BEP, Profit?

Construction Of PV Chart0 5000 10000 15000 20000 Sales Rs Fixed Cost Rs2000

400050006000

80008000

600050004000

2000ProfitRsBEP


400050006000

80008000

600050004000

2000ProfitRsBEPLossAreaProfitArea--------------------------Margin of Safety

Effect Of Change in Profit- 20% decrease in fixed CostNew 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 FC0 5000 10000 15000 20000 Sales Rs Fixed Cost Rs2000

400050006000

8000ProfitRsBEPLossAreaProfitArea80006000

50004000

2000

Effect Of Change in Profit- 10% decrease in V CostNew 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%


400050006000

800080006000

50004000

2000ProfitRs New BEPLossAreaProfitArea

Effect Of 5% Decrease in Selling Price0 5000 10000 15000 20000 Sales Rs Fixed Cost Rs2000

400050006000

800080006000

50004000

2000ProfitRs New BEPLossAreaProfitArea

ATTENTION COMMERCE STUDENTSACCOUNTING(FINANACIAL & COST) OFICMAP STAGE 1,2,3,4 (NEW CLASSES)CA..MODULE B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3BBA,MBAB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSKHALID [email protected]

Documents

m arginal c osting