PPT for Marginal costing

2.  Marginal costing considers fixed cost as period
cost. It strongly believe that fixed cost are for
business and need not be apportioned.
Hence period cost in totality are reduced from Total
contribution to arrive at Net Profit. The result (total net
profit) would be the same both in Total costing &
marginal costing only the presentation style differs.
 Semi variable or semi fixed costs are required to be
classified in the individual components of fixed cost
and variable cost

3. Marginal costing is formally defined as:
‘the accounting system in which variable costs are
charged to cost units and the fixed costs of the
period are written-off in full against the aggregate
contribution. Its special value is in decision making’

4. The term ‘contribution’ mentioned in the formal
definition is the term given to the difference between
Sales and Marginal cost. Thus
MARGINAL COST =
VARIABLE COST DIRECT LABOUR
+
DIRECT MATERIAL
+
DIRECT EXPENSE
+
VARIABLE OVERHEADS

6.  The Profit Volume (PV) Ratio is the ratio of Contribution over
Sales. It measures the Profitability of the firm and is one of the
important ratios for computing profitabilty.
 Profit Volume or P/V Ratio or C/S ratio = Contribution to Sales x
100 or as % of
Changes in profits
= Changes in sales
i.e.
Sales x P/V ratio = Contribution
i.e. Contribution x 100 = P/V ratio
Sales

7.  Break Even Point (BEP) – Situation of no profit no
loss. i.e.
when contribution is just enough to cover fixed costs i.e.
Contribution = Fixed Costs.
In terms of quantity = Fixed costs
Contribution per unit
In terms of amount = Fixed cost
P/V ratio

8.  Sales beyond break even point.
 A high margin of safety = Much below BEP than actual
sales
 A low margin of safety with high fixed costs & high P/V
ratio = efforts are required to reduce fixed cost or increase
sales volume
 A low margin of safety with low P/V ratio = Efforts are
required to reduce variable cost or increase selling price
 Margin of Safety = Sales – BEP
 Margin of Safety = Profit
P/V Ratio

9.  Classification of fixed and variable cost is difficult. Some
cost like Direct labour cost though variable, but
especially in India where workers have legal protection,
labour cost is not variable in nature.
 In today’s era of automation, fixed costs are sizable in
nature. In such case ignoring them completely is not
wise many a times.
 It does not provide any standard for evaluation like
standard or budgetary costing
 Fixation of selling price or profitability analysis based on
marginal costing is useful in short terms only.

10. 3000 UNITS FORMULA PER UNIT 40000 UNITS
300000
SALES 100 4000000
(-) 210000 (-) VARIABLE
COST
(-) 70 (-) 2800000
90000
CONTRIBUTI
ON
30 1200000
(-) 90000 (-) FIXED
COST
(-) 90000
00000
PROFIT OR
LOSS
1110000

11. P.V RATIO = CONTRIBUTION PER UNIT X 100
SALES PER UNIT
= 30 X100
100
PV RATIO = 30%

12. BEP = FC = 90000 = 300000RS
PV 30%
BEP(In Units) = FIXED COST = 90000
CONTRIBUTION 30
= 3000
units

13. Marginal Costing supports the managerial decision
making process . By the usage of this technique, the
manager can evaluate the positional standing of the
concern to a certain extent.