1. marginal costing

2. Why do we study Marginal Costing?

3. What do we study in Marginal Costing?
Marginal Cost
Marginal Costing
Direct Costing
Absorption Costing
Contribution
Profit Volume Analysis
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart

4. What do we study in Marginal Costing?
and
Why do we Study MC?
Marginal Cost
Marginal Costing
Direct Costing
Absorption Costing Management
Contribution Decision
Profit Volume Analysis Making
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart

5. Marginal Cost
“Marginal 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”

6. Marginal Cost
“Marginal cost is amount at any given 1
volume of out put by which aggregate
costs are changed if volume of output
inal Costincreased 15000
is 100 x150= or decreased by one unit”
Cost = 5000
total 20000
2
1 Manufacture 100 radio
Variable costs Rs150 p u
Fixed cost Rs 5000 Marginal cost 150 x101=15150
2 If Manufacture 101 radios Fixed Cost = 5000
TOTAL 20150
additional Cost=Rs 150

7. Marginal Costing
“marginal costing is ascertainment of
marginal cost by differentiating between
fixed and variable costs
and of the effect
of changes in volume or type of output”

8. Marginal Costing
What Could be effects of
Changes
In volume
or
Type of output

9. Marginal Costing
What Could be effects of
Changes
1 lakh units
In volume To
2 lakh units
or
Type of output

10. Marginal Costing
From One
What Could be effects of Model of
Car to
Changes
Another
In volume
or From One
Type of output Size of
product to
another

11. Marginal Costing ---Characteristics
Fixed & Variable Inventory
Costs Valuation
Marginal Costing
MC Costs as
Contribution &
Products Costs
Profit
Fixed Costs as
Pricing
Period Costs

12. Marginal Costing ---Characteristics
Segregation Semi-variable costs
Semi-variable costs
Fixed & Variable are segregated
are segregated
Costs into fixed &
into fixed &
variable
variable

13. Marginal Costing ---Characteristics
Marginal Costs Only Variable costs
Only Variable costs
as are charged
are charged
Products Costs to products
to products

14. Marginal Costing ---Characteristics
Fixed costs treated
Fixed costs treated
Fixed Costs as Period costs
Period costs
Period Costs Charged to costing
Charged to costing
P & L Account
P & L Account

15. Marginal Costing ---Characteristics
WIP & F goods are
WIP & F goods are
Inventory Valued at
Valued at
Valuation Marginal Cost
Marginal Cost

16. Marginal Costing ---Characteristics
S-V=C
S-V=C
Contribution
Profitability judged on
Profitability judged on
Contribution made
Contribution made

17. Marginal Costing ---Characteristics
Pricing is based on
Pricing is based on
Pricing Contribution &
Contribution &
Marginal Costs
Marginal Costs

18. Marginal Costing ---Characteristics
A B C Total
Sales - - - ----
Less VC - - - ----
Marginal Costing
Contribution - - - ----
&
Profit
Fixed Cost ----
Profit -----

19. Marginal Costing --- Marginal Costing Profit
Sales of A Sales of B Sales of C
less less less
Marginal cost Marginal cost Marginal cost
Of A Of B Of C
= = =
Contribution of Contribution of Contribution of
A B C
Total
Contribution of
A,B& C
less
Total Fixed = Profit/loss
Cost

20. Absorption Costing
“Absorption cost is a total cost technique
Under which total cost ie fixed & variable
is charged to production.
Inventory is also valued at total cost.

21. Absorption-Marginal Costing--differences
Measurement
Valuation Of
Fixed & Profitability
Variable
Of stock
Costs

22. Absorption-Marginal Costing--differences
Marginal Costing Absorption Costing
Fixed &
Only variable cost Both F & V Costs
Variable
Are charged
Costs FC charged to P/L

23. Absorption-Marginal Costing--differences
Valuation
Of stock
WIP & FS
at
Marginal
Total Cost
Cost

24. Absorption-Marginal Costing--differences
Measurement
Of
Profitability
C=S-V P=S-V-F

25. Comparative Cost Statement
Marginal Costing Absorption Costing
Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs 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
6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add 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

26. Comparative Cost Statement
Marginal Costing Absorption Costing
Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs 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
6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add 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

27. Comparative Cost Statement
Marginal Costing Absorption Costing
Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs 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
6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add 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

28. Concept Of Contribution

29. Contribution is the difference between
sales
And the marginal (Variable) cost
Contribution =sales-variable cost
C= S-V
Contribution = Fixed Cost+ Profit
C= F+P
Therefore
S-V = F+P

30. Contribution is the difference between
sales
And 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-F
P=C-F
F=C-P
S=F+P+V
V=S-C……….

31. PROFIT ? SALES?
C=S-V
Sales =Rs 12,000
=12,000-7000=5000 S=C+V
V Cost=RS 7,000 P=C-F
=5,000+7,000
F Cost=Rs 4,000 =5,000-4000 =Rs 12,000
=Rs 1,000

32. F COST? V Cost?
Sales =Rs 12,000 F=C-P V=S-C
V Cost=RS 7,000
=5,000-1,000 =12,000-5000
F Cost=Rs 4,000 =Rs 7,000
=Rs 4,000

33. Profit –Volume Ratio (PV Ratio)
(Expresses the relation of Contribution to sales)
Sales= Rs 10,000
V Cost=Rs 8,000
P/V Ratio =Contribution = C/S =S-V/S
Sales
C = S XP/V Ratio
P/V Ratio=c/s
C
=S-V/S
S = --------
=10,000-8000/10,000
P/V Ratio
=20%

34. Profit –Volume Ratio (PV Ratio)
When PV
Ratio is
Given
C= SXPV Ratio
C= 10000X20%
=Rs 20,000

35. Profit –Volume Ratio (PV Ratio)
Change in Contribution
P/V Ratio = --------------------------------- Another Method
Change in Sales
Change in profit
= -----------------------
Change in Sales
Year sales net profit
2005 20,000 1000
1600-1000
=-------------------x 100
2006 22,000 1600
22000-20000
600
= -----------x100=30%
2,0000

36. What Could be the Uses of PV Ratio?
Break Even Point
Profit at Given Sales
Vol required to earn given Profit

37. How Improvement in PV Ratio Could be Achieved?
Increasing Selling Price
Reducing Variable Cost
Changing Sales Mix

38. Limiting Or Key Factor
a factor in short supply

39. Limiting Or Key Factor
a factor in the activities of an undertaking
which at a point of time or over a period
will limit the volume of out put

40. Limiting Or Key Factor
What Could be the Limiting Factors ?
Labour
Materials
Power
Sales
Capacity
Machines
………….

41. Cost- Volume- Profit Analysis

42. Cost- Volume- Profit
Analysis
Cost Of Production
Selling Prices
Volume Produced /Sold

43. Cost- Volume- Profit
Analysis
Break Even Analysis
Profit Volume Chart

44. Cost- Volume- Profit
Analysis
Break Even Analysis
A point of no profit no loss
A point where revenue equals cost

45. What are BEP---assumptions
All costs are fixed or variable
VC remains Constant
Total FC remains Constant
Selling Price don’t change With Volume
Synchronisation of Prod & Sales
 No Change in Productivity per workers

46. Cost- Volume- Profit
Analysis
Break Even Analysis
Methods
Algebraic Method
Graphic Method

47. Cost- Volume- Profit
Analysis ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V
Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
Fixed Cost
BEP (Rs) = ------------------
P/V Ratio

48. Cost- Volume- Profit
Analysis ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V
Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
F Cost=Rs 12000
Fixed Cost S Price=Rs12 pu
BEP (Rs) = ------------------ V Cost =Rs 9 pu
P/V Ratio
Find BEP

49. Cost- Volume- Profit
Analysis
F Cost=Rs 12000
Other Uses S Price=Rs12 pu
V Cost =Rs 9 pu
Profit when sales are
Profit at diff. Sales Vol. a) Rs 60,000
b) Rs 1,00,000
Sales at Desired Profit

50. Cost- Volume- Profit
Analysis
F Cost=Rs 12000
S Price=Rs12 pu
Profit at diff. Sales Vol. V Cost =Rs 9 pu
Profit when sales are
C
P/V Ratio= ----- = 3/12=25% a) Rs 60,000
S b) Rs 1,00,000
WHEN SALES=Rs 60,000
contribution=salesxp/vratio
=60000x25%
=Rs 15000
Profit =contribution-fixed cost
=15000-12000
=Rs3000

51. Cost- Volume- Profit
Analysis
Other Uses F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Sales at Desired Profit Sales if desired profit
a) Rs 6000
b) Rs 15,000
F Cost +Desired Profit
Sales= -------------------------------
P/V Ratio

52. Cost- Volume- Profit
Analysis
Sales at Desired Profit F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
F Cost +Desired Profit
Sales= ------------------------------- Sales if desired profit
P/V Ratio a) Rs 6000
b) Rs 15,000
12,000+6000
a)Sales= ---------------
25%
=Rs 72,000

53. CVP Analysis -question
P ltd has earned a profit of Rs 1.80 lakh on sales of
Rs 30 lakhs and V Cost of Rs 21 lakhs.
work out
a)BEP
b)BEP When V Cost decreases by5%
c)BEP at present level when selling price reduced by5%

54. CVP Analysis -
S-V
P/V Ratio=--------
S
3000000-2100000
= ------------------------
3000000
=30%
Sales =VC+FC+P
3000000=2100000+FC+180000
FC =Rs 720000
7,20,000
BEP= -------------
30%
=Rs 2400000

55. 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

56. CVP Analysis -question
c)When Selling Price reduced by 5%
New SP=3000000—5%
=Rs 28,50,000
Contribution=28,50,000-21,00,000
=Rs7,50,000
PV Ratio =7500000/2850000
=26.32%
FC+PROFIT
Desired Sales= ------------------ =
720000+1800000
PV Ratio 26.32%
=Rs 34,19,453( appx)

57. BEP
Graphical Presentation

58. Break-Even Analysis
Costs/Revenu
e Initially a firm
will incur fixed
costs, these do
not depend on
output or sales.
FC
Q1 Output/Sales

59. Break-Even Analysis
The Break-even is
Total revenue point
occursoutputais the
As lower
The where by
Initially total
firm
The total costs the
determined the
Costs/Revenu generated,
thereforethe fixed
price,equalsless
TR TR TC will incur and
revenuecharged total
price will incur
firm these
e (assumingfirm,do
costs,
costs quantitytotal–
the – the costs in
steep the sold
VC variable would
this not depend on –
examplewill be
again this directly
accurate curve.
revenue sales.
these vary
output or
have to sell Q1 to
determinedis the
with the by
forecasts!)amount
generate sufficient
expected forecast
sum of FC+VCits
produced
revenue to cover
sales initially.
costs.
FC
Q1 Output/Sales

60. Break-Even Analysis
Costs/Revenue If the firm chose
TR TR TC to set price higher
VC than Rs2 (say
Rs3) the TR curve
would be steeper
– they would not
have to sell as
many units to
break even
FC
Q2 Q1 Output/Sales

61. Break-Even Analysis
TR)
Costs/Revenue If the firm chose
TR
TC to set prices lower
VC it would need to
sell more units
before covering
its costs
FC
Q1 Q3 Output/Sales

62. Break-Even Analysis
TR
Costs/Revenue TC
Profit VC
Loss
FC
Q1 Output/Sales

63. Break-Even Analysis
Margin of
TR TR
TC safety shows
Costs/Revenue A higher
how far sales can
VC price would
fall before losses
Assume =
made. If Q1
lower the
current sales
1000 and Q2 =
break even
1800, sales could
at Q2
point and the
fall by 800 units
margin of
before a loss
would be made
safety would
widen
Margin of Safety
FC
Q3 Q1 Q2 Output/Sales

64. High initial FC.
Interest on debt
rises each year –
Costs/Revenue FC rise therefore
FC 1
FC
Losses get
bigger!
TR
VC
Output/Sales

65. Break-Even Analysis
• Remember:
• 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

66. Break-Even Analysis
• Importance 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

67. Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Penetration pricing – ‘high’ volume, ‘low’ price –
more sales to break even

68. Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Market Skimming – ‘high’ price ‘low’ volumes –
fewer sales to break even

69. Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Elasticity – what is likely to happen to sales
when prices are increased or decreased?

70. Marginal Costing
Cost Volume Chart

71. Construction Of PV Chart
1 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

72. PV Chart Information
Fixed Cost =Rs 5000
Sales =Rs 20000(pu RS 20)
V Cost= Rs 10000(pu Rs10)
Find
PV Ratio, BEP, Profit?

73. Construction Of PV Chart
8000
6000
BEP 5000
4000
2000
Fixed Cost
Rs
Profit
0 5000 10000 15000 20000 Rs
Sales Rs
2000
4000
5000
6000
8000

74. Construction Of PV Chart
8000
6000
BEP 5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000 Margin of Safety
5000
6000
--------------------------
8000

75. Effect Of Change in Profit- 20% decrease in fixed Cost
New F Cost= 5000- 20%=Rs4000
Fixed Cost
New BEP = PV Ratio
= 4000/50%
=Rs 8000
New Profit=S-F-V
=20000-4000-10000
=Rs 6000

76. Effect of Change in profit- 20% decrease in FC
8000
6000
BEP 5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000
8000

77. Effect Of Change in Profit- 10% decrease in V Cost
New V Cost= 10000- 10%=Rs9000
New PV Ratio=20000-9000 =55%
20000
Fixed Cost
New BEP = PV Ratio
= 5000/55%
=Rs 9090 Appx
New Profit=S-F-V
=20000-5000-9000
=Rs 6000

78. Construction Of PV Chart
8000
6000
New BEP
5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000
8000

80. Effect Of 5% Decrease in Selling Price
8000
6000
5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000 EP
New B
8000