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marginal costing
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Why do we study Marginal Costing?
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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
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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
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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) Manufacture 100 radio1)Variable costs Rs150p.u
Fixed 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
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Marginal Costing
What Could be effects of
Changes
In volume
or
Type of output
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Marginal Costing
What Could be effects of
Changes
In volume
or
Type of output
1 lakh unitsTo
2 lakh units
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Marginal Costing
What Could be effects of
Changes
In volume
or
Type of output
From OneModel of
Car to
Another
From One
Size ofproduct to
another
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Marginal Costing ---Characteristics
Fixed & VariableCosts
MC Costs asProducts Costs
Fixed Costs asPeriod Costs
InventoryValuation
Contribution
Pricing
Marginal Costing&
Profit
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Marginal Costing ---Characteristics
SegregationFixed & Variable
Costs
Semi-variable costsare segregated
into fixed &variable
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Marginal Costing ---Characteristics
Marginal Costsas
Products Costs
Only Variable costsare chargedto products
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Marginal Costing ---Characteristics
Fixed Costs asPeriod Costs
Fixed costs treatedPeriod costs
Charged to costingP & L Account
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Marginal Costing ---Characteristics
InventoryValuation
WIP & F goods areValued at
Marginal Cost
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Marginal Costing ---Characteristics
Contribution
S-V=C
Profitability judged onContribution made
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Marginal Costing ---Characteristics
Pricing
Pricing is based onContribution &Marginal Costs
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Marginal costing is also termed as variable
costing, a technique of costing which includes
only variable manufacturing costs , in the form
of direct materials, direct labour, and variablemanufacturing overheads while determining
the cost per unit of a product.
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The net profit shown by marginal costing andabsorption costing techniques may not be thesame due to the different treatment of fixed
manufacturing overheads Marginal costing technique treats fixed
manufacturing overheads as period costs, whereas in absorption costing technique these are
absorbed into the cost of goods produced and areonly charged against profit in the period in whichthose goods are sold.
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The normal level of activity for the current
year is 60,000 units, and fixed costs are
incurred evenly throughout the year.
There were no stocks of the product at the
start of the quarter, in which 16,500 units
were made and 13,500 units were sold. Actual
fixed costs were the same as budgeted.
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Marginal Costing ---Characteristics
Marginal Costing&
Profit
A B C Total
Sales - - - ----
Less VC - - - ----
Contribution - - - ----
Fixed Cost ----
Profit -----
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Marginal Costing --- Marginal Costing Profit
Sales of A
Marginal costOf A
Contribution ofA
Total
Contribution ofA,B& C
Total FixedCost
Sales of B
Marginal costOf B
Contribution ofB
Sales of C
Marginal costOf C
Contribution ofC
less
=
less less
= =
less
= Profit/loss
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Absorption Costing
Absorption cost is a total cost technique
Under which total cost i.e. fixed & variableis charged to production.
Inventory is also valued at total cost.
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Absorption-Marginal Costing--differences
Fixed &
VariableCosts
Marginal Costing
Only variable cost
FC charged to P/L
Absorption Costing
Both F & V CostsAre charged
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Absorption-Marginal Costing--differences
Valuation
Of stock
WIP & FS
atMarginal
Cost
Total Cost
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Absorption-Marginal Costing--differences
MeasurementOf
Profitability
C=S-V P=S-V-F
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Comparative Cost Statement
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Cost Statement- Marginal Costing-production=sales
Sales (40,000 units @ Rs.15 per
unit)
(Rs.)6,00,000
Less: cost of goods
manufactured:
Material and Labor cost
Variable manufacturing
overheads
Contribution
Less: fixed overheads
other fixed overheads
Net income
3,20,000
80,000
50,000
1,00,000
4,00,000
2,00,000
1,50,000
50,000
Sales (40,000 units @ Rs.15 perunit)
6,00,000
Less: cost of goods
manufactured:
Material and Labor
costVariable manufacturing
overheads
Fixed manufacturing overheads
Gross profit
Less: other fixed overheads
Net income
3,20,000
80,000
50,000 4,50,000
1,50,000
1,00,000
50,000
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Production 1 lakh units ;Sales 80,000 units;
Selling price/unit Rs.15 ;Direct material Rs.2,50,000
Direct labour Rs.3,00,000 ;
Factory overheads:- Variable Rs.1,00,000
- Fixed Rs. 2,50,000
Selling and distribution
-Variable Rs.1,00,000
-fixed Rs.2,00,000
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Cost Statement- production> sales
Sales (80,000 units @ Rs.15 perunit)
(Rs.)
12,00,000
Less: cost of goods
Material
Labor cost
Factory overheads : Variable
: fixed
Less: closing stock
(20000/100000*Rs.9,00,000
other fixed overheads
Gross profit
Less :
Selling and distribution: Variable
: fixed
Net profit
2,50,000
3,00,000
1,00,000
2,50,0009,00,000
1,80,000
2,00,000
1,00,000
7,20,000
4,80,000
3,00,000
1,80,000
Sales (80,000 units @ Rs.15
per unit)
(Rs.)
12,00,000
Less: cost of goods
Material
Labor cost
Factory overheads : Variable
Less: closing stock
(20000/100000*Rs.6,50,000
Selling and distribution:
Variable
contribution
Less : fixed FOH
fixed S&D
Net profit
2,50,000
3,00,000
1,00,000
6,50,000
1,30,000
5,20,000
1,00,000
2,50,000
2,00,000
6,20,000
5,80,000
4,80,000
4,50,000
1,30,000
absorption Marginal costing
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Cost Statement- production> sales
Sales (80,000 units @ Rs.15 perunit)
(Rs.)
12,00,000
Less: cost of goods
Material
Labor cost
Factory overheads : Variable
: fixed
Less: closing stock
(20000/100000*Rs.9,00,000
other fixed overheads
Gross profit
Less :
Selling and distribution: Variable
: fixed
Net profit
2,50,000
3,00,000
1,00,000
2,50,0009,00,000
1,80,000
2,00,000
1,00,000
7,20,000
4,80,000
3,00,000
1,80,000
Sales (80,000 units @ Rs.15
per unit)
(Rs.)
12,00,000
Less: cost of goods
Material
Labor cost
Factory overheads : Variable
Less: closing stock
(20000/100000*Rs.6,50,000
Selling and distribution:
Variable
contribution
Less : fixed FOH
fixed S&D
Net profit
2,50,000
3,00,000
1,00,000
6,50,000
1,30,000
5,20,000
1,00,000
2,50,000
2,00,000
6,20,000
5,80,000
4,80,000
4,50,000
1,30,000
absorption Marginal costing
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Concept Of Contribution
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Contribution is the difference between salesAnd the marginal (Variable) cost
Contribution =sales-variable costC= S-V
Contribution = Fixed Cost+ Profit
C= F+PThereforeS-V = F+P
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Contribution is the difference between salesAnd the marginal (Variable) cost
S-V=F+P
If any 3 factors in the equation are known
The 4th could be found out
P=S-V-FP=C-F
F=C-PS=F+P+VV=S-C.
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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?
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ProfitVolume 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
CS = --------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%
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ProfitVolume Ratio (PV Ratio)
When PVRatio isGiven
C= SXPV Ratio
C= 10000X20%
=Rs 20,000
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ProfitVolume Ratio (PV Ratio)
Another Method
Change in Contribution
P/V Ratio = ---------------------------------Change in Sales
Change in profit= -----------------------
Change in Sales
1600-1000
=-------------------x 10022000-20000
600= -----------x100=30%2,0000
Year sales net profit
2005 20,000 1000
2006 22,000 1600
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What Could be the Uses of PV Ratio?
Break Even Point
Profit at Given Sales
Vol required to earn givenProfit
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How Improvement in PV Ratio Could be Achieved?
Increasing Selling Price
Reducing Variable Cost
Changing Sales Mix
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Limiting Or Key Factor
a factor in short supply
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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
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Limiting Or Key Factor
What Could be the Limiting Factors ?
LabourMaterialsPower
SalesCapacityMachines
.
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Cost- Volume- Profit Analysis
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Cost- Volume- Profit Analysis
Cost Of Production
Selling Prices
Volume Produced /Sold
http://images.google.co.in/imgres?imgurl=http://www.bus.duq.edu/faculty/bodnar/cvp/img003.gif&imgrefurl=http://www.bus.duq.edu/faculty/bodnar/cvp/sld003.htm&h=360&w=480&sz=9&hl=en&start=4&tbnid=y_zHQsK_28wWzM:&tbnh=97&tbnw=129&prev=/images%3Fq%3DCVP%2BANALYSIS%26svnum%3D10%26hl%3Den%26lr%3D8/4/2019 2 Marginal Costing
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Cost- Volume- Profit Analysis
Break Even Analysis
Profit Volume Chart
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What are BEP---assumptions
All costs are fixed or variableVC remains ConstantTotal FC remains ConstantSelling Price dont change With Volume
Synchronisation of Prod & Sales No Change in Productivity per workers
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Cost- Volume- Profit Analysis
Break Even Analysis
Methods
Algebraic Method
Graphic Method
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Cost- Volume- Profit Analysis
ALGEBRAIC
METHODFixed Cost
BEP (Units) = --------------- = FContribution PU S-V
Fixed CostBEP (Rs ) = ----------------- x Sales
Contribution
Fixed CostBEP (Rs) = ------------------P/V Ratio
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Cost- Volume- Profit Analysis
ALGEBRAIC
METHODFixed Cost
BEP (Units) = --------------- = FContribution PU S-V
Fixed CostBEP (Rs ) = ----------------- x Sales
Contribution
Fixed CostBEP (Rs) = ------------------P/V Ratio
F Cost=Rs 12000S Price=Rs12 pu
V Cost =Rs 9 pu
Find BEP
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Cost- Volume- Profit Analysis
Profit at diff. Sales Vol.
C
P/V Ratio= ----- = 3/12=25%S
WHEN SALES=Rs 60,000
contribution=salesxp/vratio=60000x25%=Rs 15000
Profit =contribution-fixed cost=15000-12000
=Rs3000
F Cost=Rs 12000S Price=Rs12 pu
V Cost =Rs 9 pu
Profit when sales are
a) Rs 60,000
b) Rs 1,00,000
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Cost- Volume- Profit Analysis
Other Uses
Sales at Desired Profit
F Cost +Desired Profit
Sales= -------------------------------
P/V Ratio
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Sales if desired profit
a) Rs 6000b) Rs 15,000
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Cost- Volume- Profit Analysis
Sales at Desired Profit
F Cost +Desired Profit
Sales= -------------------------------
P/V Ratio
12,000+6000
a)Sales= ---------------25%
=Rs 72,000
F Cost=Rs 12000S Price=Rs12 puV Cost =Rs 9 pu
Sales if desired profit
a) Rs 6000b) Rs 15,000
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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%
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CVP Analysis -question
b) When V Cost increases by 5%
New Variable Cost=2100000+5%=22,05,000
PV Ratio 3000000-22050003000000
=26.5%
BEP =7,20,000/ 26.5%
=Rs 27,16,981
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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)
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BEP
Graphical Presentation
Break-Even Analysis
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Break-Even Analysis
Remember:
A higher price or lower price does not meanthat break even will neverbe reached!
The BE point depends on the sales needed togenerate revenue to cover costs
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Break-Even Analysis
Importance ofPrice Elasticity of Demand:
Higher prices might mean fewer sales to break-even
Lower prices might encourage more customers buthigher volume needed before sufficient revenuegenerated to break-even
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Break-Even Analysis
Links of BE to pricing strategies and elasticity
Penetration pricinghigh volume, low price more sales to break even
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Break-Even Analysis
Links of BE to pricing strategies and elasticity
Market Skimminghigh price low volumes fewer sales to break even
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Break-Even Analysis
Links of BE to pricing strategies and elasticity
Elasticity what is likely to happen to sales whenprices are increased or decreased?
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SabreProducts Ltd. makes and sells a single
product. The variable cost is $3/unit and the
variable cost of selling is $1/unit. Fixed costs
total $6,000 and the unit sales price is $6.
Sabre Products Ltd. budgets to make and sell
3,600 units in the next year.
Draw a breakeven chart, and a P/V graph, each
showing the expected amount of output and
sales required to breakeven, and the safety
margin in the budget.
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Marginal CostingCost Volume Chart
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