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Marginal Costing - M4

Marginal costing is a technique that involves classifying costs as either fixed or variable. Variable costs change with output levels while fixed costs remain constant. Marginal costing is used to determine contribution, break-even point, and profit-volume ratio to aid decision making. The break-even point is where total revenue equals total costs, and no profit or loss occurs. It can be calculated using the contribution per unit and total fixed costs. Marginal costing separates costs to identify the profitability of products and output levels.

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58 views

Marginal Costing - M4

Marginal costing is a technique that involves classifying costs as either fixed or variable. Variable costs change with output levels while fixed costs remain constant. Marginal costing is used to determine contribution, break-even point, and profit-volume ratio to aid decision making. The break-even point is where total revenue equals total costs, and no profit or loss occurs. It can be calculated using the contribution per unit and total fixed costs. Marginal costing separates costs to identify the profitability of products and output levels.

Uploaded by

sukesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MARGINAL COSTING

MARGINAL COSTING
A technique of decision making, which involves;
 Ascertainment of Total Costs

 Classification of costs into:

Fixed cost Variable cost


 Use of such information for analysis and decision
making.
 In other words it is a technique of costing dividing all
the costs into variable cost and fixed cost
 Also called as “Variable costing”
DEFINITION
 Marginal costing is defined as “the accounting system in
which variable costs are charged to cost units and fixed
costs of the period are written off in full against the
aggregate contribution.”

 Marginal cost is the additional cost of producing an


additional unit of product. It is the total of all variable
cost.
VARIABLE COST

 It is that cost which changes or varies proportionately in


relation to output or quantity
 VC = DM + DL + VOH
 VC per unit remains constant
 Eg : Raw materials, wages on hourly basis, etc
FIXED COST

 It is that cost which remains constant for a given period


of time, irrespective of level of output
 FC = FPOH + FAOH + FSOH
 FC per unit varies inversely with change in level of
output
 Eg : Rent, salary, insurance, etc
SEMI-VARIABLE COST

 It exhibits the characteristics of Fixed and Variable costs


 Eg: Telephone charges, Salary, etc.
COST SHEET
Traditional(function-wise) Marginal(variability)
Direct cost xx Variable cost xx
FOH xx Fixed Cost xx
AOH xx Total cost xx
SOH xx Profit xx
Total cost xx Sales xx
+Profit xx
Sales xx
MARGINAL COST EQUATION
 Fixed cost + Variable cost+ Profit = Selling price
 Contribution = Fixed cost + Profit

= SELLING PRICE – VARIABLE COST

MARGINAL COST SHEET


SALES XX
- VARIABLE COST XX
CONTRIBUTION XX
- FIXED COST XX
PROFIT XX
DECISION MAKING INDICATORS IN
MARGINAL COSTING

Profit Volume Ratio Break Even Point


-Relation b/w -No Profit no Loss
Contribution & sales situation

Margin of safety
-Difference b/w BES
& Total sales
CONCEPT OF CONTRIBUTION

 The difference between selling price and marginal cost


(variable cost) is called contribution.

 Contribution = Selling Price – Variable Cost

 Contribution = Fixed Cost + Profit

 Contribution = Fixed Cost - Loss


CONCEPT OF PROFIT VOLUME RATIO
 Relation b/w Contribution & sales
 PVR is used to determine the BEP, sales volume to earn
the desired profit, Profitability of products.
 P/V Ratio = Contribution *100

Sales

Or Fixed Costs + Profit * 100


Sales

Or Sales – Variable cost * 100


Sales
CONCEPT OF BREAK EVEN POINT
 Represents that volume of sales or production where
there is no profit no loss.

 At BEP total cost line cuts total revenue line.

 Total Revenue = Total Cost

 Total Contribution = Fixed costs


FORMULA

 Break even sales (in Rs.) = Total Fixed Cost


P.V. Ratio

Or Total Fixed cost * selling price per unit


Contribution per Unit

 Break even Point (units) = Total Fixed Cost


Contribution per Unit
ASSUMPTIONS IN BREAK EVEN
ANALYSIS
 All costs can be separated into fixed and variable
component

 Fixed cost will remain constant at all volumes of output

 Variable costs will fluctuate in direct proportion to


volume of output

 Selling price per unit will remain constant at all levels of


output
ASSUMPTIONS IN BREAK EVEN
ANALYSIS
 There is only one product or in the case of multiple
products, the sale mix will remain constant i.e sale of
various products will always be in some predetermined
proportions.

 Production and sales will be synchronized.

 Productivity per worker will remain unchanged.

 Methods of production and operating efficiency will not


change
PROBLEM
Let the Selling price per unit of a product A be Rs. 100,
DM– Rs.20, DL- Rs.30, VOH-Rs.10.
Fixed costs Rs.10,000. Assuming that the factory sells
1,000 units, find the break even point and show the break
even chart.
MARGINAL COST SHEET FOR 1000
UNITS
Sales 100 100000
Less: VC
D. Material 20 20000
D. Labour 30 30000
Variable OH 10 10000 60000
Contribution 40 40000
Less: Fixed Cost 10000
Profit 30000
COMPUTATION OF BEP
 PV ratio = Contribution *100
Sales
40000/100000*100

40%
 Break even sales (in Rs.) = Fixed Costs
P.V. Ratio
10000/0.40

Rs.25000
 Break even quantity(units) = Fixed costs
Contribution p.u.
10000/40

250 units

Therefore produce 250 units in order to cover the fixed cost.


MARGINAL COST SHEET FOR BREAK
EVEN UNITS
Sales 100 100000 25000 20000
Less: VC
D. Material (20)
D. Labour (30)
Variable OH (10) 60000 15000 12000
Contribution 40 40000 10000 8000
Less: Fixed Cost 10000 10000 10000
Profit/Loss 30000 NIL (2000)
BREAK EVEN CHART

TR
Amount

profit TC

BEP
25000

loss FC

250 Output

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