MARGINAL COST

1. From the following information prepare a Marginal cost statement.

Variable cost: Rs.
Direct material 6000
Direct wages 3000
Factory overheads 1500
10500
Fixed cost:
Administrative expenses 3400
Total cost 13900
Profit 2100
Sales 16000
Solution
Marginal cost statement

Rs Rs
Sales 16000
Less: variable cost
Direct material 6000
Direct wages 3000
Factory overheads 1500 10500
Contribution 5500

Less: fixed cost

Administrative expenses 3400
Profit 2100
2. from the following data, find out the amount of fixed expenses
Rs
Sales 300000
Direct material 90000
Direct labour 55000
Variables Overhead 30000
Profit 60000
Solutions
Calculations of fixed expenses
Rs Rs
Sales 300000
Less: variable cost
Direct material 90000
Direct wages 55000
Variable overhears 30000 175000
Contribution 125000
Less: fixed expenses(bal.fig) 65000
Profit 60000
3. calculate the break-even point in terms of rupees.
Sales 800000
Fixed expenses 200000
Variable cost:
Direct materials 250000
Direct labour 130000
Other variable expenses 70000
Solutions
BEP (in Rs) = Fixed expenses x sales
contribution
contribution = sales-variable cost
= 800000-450000
= Rs. 350000
BES = 200000 x800000 = 4,57,143.
350000

4. the following information is given for two companies

J ltd C ltd
Rs Rs
Units produced and sold 20000 20000
Rs Rs
Revenues 250000 250000
Fixed cost 90000 40000
Operating income 69000 65000
Variable cost 91000 145000
Find out the break-even point of each company both in units as well as volume
solutions
J ltd C ltd
Rs Rs
Sales 250000 250000
Less: variable cost 91000 145000
Contribution 159000 105000
Less: fixed cost 90000 40000
Profit (operating income) 69000 65000

B.E.P (in Rs.) = fixed cost x sales

Contribution
= 90000 x 250000 = 40000 x 250000
159000 105000
= Rs. 1,41,509 = Rs.95,238
Selling price per unit = 250000 = Rs. 12.50
20000
BEP (in units) = BES
Selling price p.u.

1,41,509 =11,321 units 95,238 = 7619 units.

12.50 12.50
(rounded off) (rounded off)

5. calculate B.E.P from the following details:

Fixed expenses Rs.150000
Variable cost per unit Rs. 10
Selling price per unit Rs. 15
Solutions
B.E.P (in units) = fixed expenses
Contribution per unit

Contribution per unit = selling price per unit -variable cost per unit
= Rs.15-Rs.10 =Rs.5
B.E.P. (in units) = 150000 = 30000 units
5
B.E.P (in units) = fixed expenses x selling price
Contribution per unit

= 150000 x 15 = Rs. 4,50,000

5

6. From the following particulars find out the B.E.P. What will be selling price per unit if
BEP is to be brought down to 10,000 units?
Rs.
Variable cost per unit 80
Fixed Expenses 290000
Selling Price Per Unit 100

Solution

B.E.P. (in units) = Fixed Expenses

Contribution per unit

2,90,000 = 2,90,000 = 14,500 units.

100-80 20
If break-even point is brought down to 10,000 units, fixed expenses are to be recovered from
10,000 units,

Fixed expenses per unit = Fixed Expenses 2,90,000

Number of units 10,000 = Rs. 29.

When B.E.P is 10,000 units, selling price per unit is calculated as follows:
Selling Price = Fixed Expenses Per Unit + Variable Expenses Per Unit
= Rs. 29+ Rs 80 = Rs. 109
7. P.V ratio is 50%.marginal cost is Rs. 60. What is the selling price per unit?

Solution
P/V ratio is 50%
Therefore contribution is Rs. 50 when sales are Rs.100.
Therefore variable cost = sales – contribution
= 100 - 50 =Rs. 50.
If variable cost is Rs 50, selling price is Rs. 100
If variable cost is Rs.60, selling price = 100/50 x 60 = Rs.120
Therefore, selling price p.u = Rs. 120
8. a company producing 70,000 units of product working at 70% capacity recevies an order
form a forigen dealer for 30,000 units at Rs. 60.00 per unit although the local price is Rs. 110
per unit.
Rs
Material 25
Labour:
Skilled labour(fixed) 15
Unskilled labour 15
Variable overhead 10
Fixed overhead 25
Total 90 per unit
i) advise the management whether to accept the forign order or not.
ii) what will be your advice if the order has come from the local merchant?
iii) if there is tenporary fall in demand what will be the menimum selling price to be
changed?
Solution
Calculation of contribution
per unit for 3000 units
Rs Rs
Selling price 60 18,00,000
Less: variable cost
Materials 25
Unskilled labour 15
Variable overhead 10 50 15,00,000
Contribution 10 3,00,000
9. a company produces and markets industrial goods. Due to heavy competiton the company
proposed to reduce the selling price. If the present level of profit is to be maintained indicate
the number of units to be sold if the proposed reduction in selling price is (1) 10%;(2) 15%(3)
20%
The followinf additional information is available
Rs
Present sales(30,000 units) 600000
Variable cost (30,000 units) 360000
Contribution 240000
Less fixed assets 140000
Profit 100000

solution
present selling price per unit is Rs. 20 (600000/30000)
if the reduction is 10% = 20 – 10 % = Rs. 18.
If the reduction is 15% = 20 – 15 % = Rs. 17
If the reduction is 20% = 20 – 20 % = Rs. 16
Contribution at various proposed selling prices
10% 15% 20%
Selling price 18 17 16
Less variable cost (360000/30000) 12 12 12
Contribution per unit 6 5 4

Total contribution required to maintain the present level of point is as follows

Rs
Present sales 600000
Less variable cost 360000
Total contribution 240000
10. the management of a company finds thst while the cost of making a component parts is
Rs. 15, the same available in the market at Rs. 13 with an assurance of continuous supply.
Give a suggession whether to make or buy this part. Give also your views in case the
supplier reduces the price from Rs.13 to Rs. 11
The cost information is as follows
Rs
Material 3.50
Direct labour 5.50
Other variable expenses 3.00
Fixed expenses 3.00
Total 15

Solutions
Marginal cost statement
Rs
Material 3.50
Direct labour 5.50
Other variable expenses 3.00
Total 12.00
 STANDARD COSTING

11. product X requires 16kgs. Of materials at Re. 1 per kg. the actual consumption of material
for the manufacturing of product X came to 20 kgs. Of materials at Rs. 1.50 per kg. calculate
material cost variance.
Solution
Material cost variance = (SQ x SP) – (AQ x AP)
= (16 x 1) – (20 x 1.50)
= 16 – 30 = Rs. 14(A)
12. calculate material variances.
Material S.P per kg Std. mix for Actual AP per kg (Rs)
12000 tiles (kg) usage(kg)
A 5 1200 12000 7
B 9 600 6000 6

Actual output: 100000 tiles

Solutions
i) material cost variance = (SQ X SP ) – (AQ X AP )
SQ refers to standard quality for actual production.
For production of 12000 tiles SQ of A = 1200 kgs.
For actual production of 100000 tiles, SQ of A = 100000/12000 x 1200
= 10,000 kgs
For production of 12000 tiles, SQ of B = 600 kgs.
For actual production of 100000 tiles, SQ of B = 100000/12000 x 600
= 5000 kgs.
Material cost variance A = ( 10000 x 5) – ( 12000 x 7)
= 50000 – 84000 = 34000(A)
B = ( 5000 x 9 ) – (6000 x 6 )
= 45000 – 36000 = 9000(F)
Total material cost variance Rs 25000 (A)

ii) material price variance = ( SP – AP ) AQ

A = (5-7) 12000 = 24000 (A)
B = (9-6) 6000 = 18000(F)

Total material price variance Rs. 6000(A)

iii) material usage variance = (SQ -AQ) SP
A = ( 10000 – 12000)5 = 10000(A)
B = (5000 – 6000)9 = 9000(A)
Total material usage variance Rs. 19000 (A)
iv) material mix variance = (RSQ- AQ) SP
revised standard quality (RSQ)
= standard quality X total actual quality
Total standard quality
RQS for A = 10000/15000 x 18000 = 12000
RQS for B = 5000/15000 x 18000 = 6000
Material mix variance A = (12000-12000)x 5 = 0
B = (6000 – 6000)x 9 = 0
Total mix variance 0
v) material sub usage variance = (SQ – RSQ)SP
A = (10000-12000)5 = 10000(A)
B = (5000-6000)9 = 9000(A)
Total material sub usage variance = Rs. 19000(A)
DIRECT LABOUR VARIANCES
13. calculate labour variance for the two departments form followings:
Dept. A Dept. B
Actual gross wages(direct) Rs.2000 Rs.1800
Standard hours produced 8000 6000
Standard rate per hour 30 paise 35 paise
Actual hours worked 8200 5800

Solution
i) labour cost variance = (std.hr x std. rate) – (actual hour x actual rate)
A = (800x 0.30) – 2000 = 2400 – 2000 = 400(F)
B = (6000x 0.35) – 1800 = 2100 – 1800 = 300(F)
Total labour cost variance 700 (F)
ii) labour rate variance (std. rate – actual rate) x actual hour
A = (0.30 x 8200) – 2000 = 2460 – 2000 = 450(F)
B = (0.35 x 5800) – 1800 = 2030 – 1800 = 230(F)
Total labour rate variance 690(F)
iii) labour efficiency variance = (SH – AH) x SR
A = (8000 – 8200) x 0.30 = 60(A)
B = (6000 – 5800) x 0.35 = 70(F)
Total labour efficiency variance 10(F)
14. calculate variable overhead variance form the following data:
Budget production for January, 2000 3000 units
Budget variable overhead Rs.15000
Standard time for one unit 2 hrs.
Actual production for January, 2000 2500 units
Actual hours overhead 4500 hrs.
Actual variable overhead Rs. 13500

Solutions
1. variable overhead cost variance
= actual output x standard variable overhead rate) – actual variable overhead
= (2500 x5) – 13500 = 1000(A)
2. variable overhead expenditure or spending variance
= ( actual hours x standard variable overhead rate ) – actual variable overhead
= (4500 x 2.50) – 13500 = 2250(A)
3.variable overhead efficiency rate
= standard variable overhead rate (standard hours for actual output – actual
hours)
= 2.50(5000-4500) = 1250(F)
SALES VARIENCE
15. the budget and actual sales for a period in respect of two products are as follows:
Material Budgeted Actual price
Qty.(kg) Per. Unit Total (Rs.) Qty.(kg) Per unit Total (Rs.)
(Rs.) (Rs.)
A 600 3 1800 800 4 3200
B 800 4 3200 600 3 1800
Calculate the variance.
Solutions
i) sale value variance = (actual sales – standard sales)
= (AQ x AP) – (SQ x SP)
A = (800 x4) – (600x3) = 3200 -1800 = 1400(F)
B = (600 x 3)- (800x 4) = 1800-3200 =1400(A)
0
ii) sales price variance = (AP -SP)
A= (4-3)800 =800(F)
B= (3-4)600 = 600(A)
Total sales price variance 200(F)
iii) sales volume variance = (AQ – SQ ) SP
A = (800-600)3 = 600(F)
B = (600- 800)4 = 800(A)
Total sales volume variance = 200 (A)

MISCELLANEOUS ILLUSTRATIONS
1. From the following you are required to calculate
i) material cost variance ii) material price variance iii) material usage variance
quantity of materials purchased 300 units.
Value of materials purchased Rs.9000
Standard quantity of material required for one ton of finished product 25 units
Standard rate of material Rs. 2 per unit
Opening stock of material - nil
Closing stock of material 500 units.
Finished production during the period 80 tonnes.
Solutions
1.Material cost variance = (SQ X SP) – (AQ X AP )
standard quantity of production of one ton = 25 units
standard quantity of actual production of 80 tonnes
= 80 x 25 = 2000 units
Actual quantity consumed = opening stock + purchase – closing stock
= 0+ 3000 – 500 = 2500 units
Actual price = 9000/3000 = Rs. 3 per unit
2. material price variance = (SP – AP) AQ
= (2-3)2500 = Rs, 2500 (A)
3. material usage variance = (SQ- AQ)AP
= (2000-2500)2 = Rs.1000(A)
16. form the following calculate the labour variances
A factory worked for 5000 labour hours during a week. 200 hours were wasted due to power
failure. The Sunday works done by the workers were equal to 6000 standard hours. The
standard rate per hour was is. 12. The actual wages rate was Rs.15 per hr.
Solution
i) labour cost variance = (SH x SR) – (AH x AR)
= (6000 x12)- (5000x 15)
= 72000 – 75000 = 3000(A)
ii) labour rate variance = (SR- AR)X AH
= (12- 15) 5000 = 15000(A)
iii) labour effective variance = (SH – AH ) X SR
= (6000-5000) X 12 =12000(F)
iv) labour idle time variance = SR x idle time hours
= 12 x 200 = 2400(A)
ILLUSTRATION-28
Find the profit from the following data:
Sales Rs.1,20,000
Marginal cost Rs.90,000
Break-even sales Rs.90,000
Ans:
Profit = Contribution – Fixed Expenses
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
P.V Ratio = x 100
𝑆𝑎𝑙𝑒𝑠

= 1,20,000−90,000
x100
𝑠𝑎𝑙𝑒𝑠

=25%

Fixed expenses
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
BES=
𝑃.𝑉.𝑅𝑎𝑡𝑖𝑜
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
90,000=
25%
25
Therefore, fixed expenses = 90,000 x = Rs.22,500
100

Profit = contribution – Fixed Expenses

Rs.
Contribution 30,000
Less: fixed Expenses 22,500
Profit 7,500
Illustration 29
The following information relating to xyz company is
given to you:
Rs.
Sales 4,50,000
Fixed cost 2,00,000
Variable cost 2,60,000
Ascertain how much the value of sales must be
increased for the company to break-even.
Ans:
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
B.E.P (in Rs.) = x sales
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
Contribution = sales – variable cost
= 4,50,000 – 2,60,000
=Rs.1,90,000
2,00,000
B.E.P (in Rs)= x 4,50,000 =Rs. 4,73,684
1,90,000

B.E.S. =Rs. 4,73,684

Present sales =Rs. 4,00,000
Therefore, sales are to be increased by Rs. 73,684 to break-even.
Illustration 30
From the following data, Calculate Break-even point
expressed in terms of units and also the new B.E.P. if
selling price is reduced by 10%.
Fixed Expenses
Depreciation Rs. 1,20,000
Salaries Rs. 1,10,000
Variables Expenses
Materials Rs. 4 per unit
Labour Rs. 3 per unit
Selling Price Rs. 15 per unit.
Ans:
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
(i) B.E.P.(in units) =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2,30,000 2,30,000
= = = 28,750 units.
15−7 8

(ii) New B.E.P (in units) when selling price is

reduced by 10%

Selling price Rs.15.00

Less: 10% Reduction Rs. 1.50
New selling price Rs.13.50

=2,30,000 2,30,000
= = 35,385 units.
13.50−7 6.50
Illustration 31
Given:
Fixed cost Rs: 12,000
Break even sales (in units) 5,000
Sales 10,000 units
Selling price per unit Rs.10
Calculate a. Variable cost
b. Profit when sales are 10,000 units.
Ans:
A. Calculate variable cost
At break-even sales, profit is NIL
Rs.
Break-even sales 50,000
Less: variable cost (bal.fig) 38,000
Contribution 12,000
Less: Fixed cost 12,000
Profit 0

Variable cost p.u. =38,000/5000 units =Rs.7.60

B. Profit when sales are 10,000 units

Sales (10,000x rs.10) 1,00,000
Less: Variable cost (10,000x7.60) 76,000
Contribution 24,000
Less: fixed cost 12,000
Profit 12,000
Illustration -32
From the following data calculate:
(i). P/V Ratio
(ii). Profit when sales are Rs. 25,000
(iii).New break-even sales if Selling price is reduced by 10%
Fixed expenses Rs.6,000
Break-even Sales Rs.15,000
Ans:
(i).P.V Ratio
𝐹𝑖𝑥𝑒𝑑 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
B.E.S =
𝑃.𝑉 𝑅𝑎𝑡𝑖𝑜

6,000
15,000 =
𝑃.𝑉.𝑟𝑎𝑡𝑖𝑜
6,000 6
P.V. Ratio = = =0.4 x 100 =40%
15,000 15

(ii). Profit when sales are Rs. 25,000

Profit =Contribution – Fixed Expenses
Contribution =sales x P.V.Ratio

40
=25,000 x = Rs.10,000
100
Profit = 10,000 – 6,000 =Rs. 4,000.

(iii). New Break-even sales if selling price is reduced

by 10% contribution is Rs.40 when selling Price is
Rs.100
S-V=C
100-V=40
V=60
 Rs.
Selling price 100
Less:10% reduction 10
Revised selling price 90
Less: Variable cost 60
New contribution 30

30
New P.V Ratio = x100 = 33.33%
90

6,000 6,000
New B.E.S = (or) x3 =Rs. 18,000
33.33% 1