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# Marginal cost

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marginal cost accounting
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# Marginal cost

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### Marginal cost

1. 1. MARGINAL COST 03/27/15 1S Kacker, IHM Mumbai
2. 2. MARGINAL COST The amount at any given volume of output by which the aggregate costs are changed if the volume of output is increased or decreased by one unit. 03/27/15 2S Kacker, IHM Mumbai
3. 3. MARGINAL COST Variable Cost per unit Rs 10 Fixed expenses Rs 1,50,000 Output 30,000 units Total Cost: Variable Cost 30,000 X 10 = 3,00,000 Fixed Cost = 1,50,000 Total Cost = 4,50,000 If output is increased by One Unit Then: Variable Cost 30,001 X 10 = 3,00,010 Fixed Cost =1,50,000 New Total Cost =4,50,010 Less Old Total Cost 4,50,000 10 10 is Marginal Cost 03/27/15 3 S Kacker, IHM Mumbai
4. 4. CONTRIBUTION Contribution is the difference between Sales and Marginal Cost of sales. It contributes towards Fixed Expenses and Profit. Contribution will first meet Fixed expenses and then to gain profit. 03/27/15 4S Kacker, IHM Mumbai
5. 5. CONTRIBUTION SP = Rs 15 MC = Rs 10 Contribution = SP-MC C= 15-10 C= 5 i.e at output of 30,000 units C= 1,50,000 = (30,000 X 5) 20,000 units C=1,00,000 = (20,000 X5) 40,000 units C = 2,00,000 = (40,000 X 5) 03/27/15 5S Kacker, IHM Mumbai
6. 6. CONTRIBUTION At 30,000 units Contribution = FE At 40,000 units Contribution = FE + 50,000 (profit) At 20,000 units Contribution = Loss of 50,000 03/27/15 6S Kacker, IHM Mumbai
7. 7. EQUATIONS Sales = TVC+FE +/- P/L SP – VC = FE +/- P/L SP – VC = Contribution Contribution = FE +/- P/L 03/27/15 7S Kacker, IHM Mumbai
8. 8. 03/27/15 S Kacker, IHM Mumbai 8 Marginal Cost (MC) = Prime Cost + Variable Expenses = Variable Cost Contribution = Sales – TVC = SP – MC Profit = Contribution – FE Variable Rate (VR) = VC/Sales Contribution Rate (CR) = 1 - VR = 1 - VC Sales
9. 9. EQUATIONS Contribution Rate = Contribution (CR) Sales CR = Sales – VC Sales = Sales – VC Sales Sales = 1 - VC Sales = 1- VR 03/27/15 9S Kacker, IHM Mumbai
10. 10. BREAK EVEN POINT (BEP) A business is said to be at break even when its Total Sales are equal to its Total Cost. TS = TC It is a point of No Profit No Loss i. e Contribution = FE + O (Profit) C = FE 03/27/15 10S Kacker, IHM Mumbai
11. 11. BREAK EVEN POINT (BEP) Can be determines by : 1.Formula approach expressed in terms of Units/ Volume or Value of Money. 2. Chart or graph approach 03/27/15 11S Kacker, IHM Mumbai
12. 12. BREAK EVEN POINT (BEP) in units Y1 = FE + Vx Y1 = Total Cost FE = Fixed Expenses V = Variable Cost/Unit x = no of units (output)_______________ I Y2 = SPx Y2 = Total Sales/Revenue SP = Selling Price/Unit x = no of units (output) __________________II At Break even Total Sales = Total Cost Y2 = Y1 SPx = FE +Vx 03/27/15 12 S Kacker, IHM Mumbai
13. 13. Break even point in terms of Physical Volume (units or numbers) X = FE____ SP _ VC Where FE = Total Fixed Cost SP = Selling price/unit VC = Variable Cost /Unit x = no of units at BEP 03/27/15 13S Kacker, IHM Mumbai
14. 14. Break even point in terms of Money or Value (Rupees) BEP in units = FE SP – VC BEP in sales/ Revenue = FE X SP SP – VC FE = SP – VC SP FE_ 1- VC SP = FE 1-VR = FE_____ Contribution Rate 03/27/15 14 S Kacker, IHM Mumbai
15. 15. BREAK EVEN CHART /GRAPH Break even chart is a device in graphic form, designed to portray the principal Sales-Cost – Profit Analysis of a particular operations. It shows the BEP and also indicates the estimated Profit /Loss at various levels of activity. Sales Volume (output) is shown along X axis. Cost & Revenue (rupees) related to sales Volume (output) are shown along Y axis. 03/27/15 15S Kacker, IHM Mumbai
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24. 24. BREAK EVEN ANALYSIS •BEP and Break even chart are two by products of break even analysis. •Break even analysis is also known as Cost Volume profit analysis (CVP analysis). •The analysis is a tool of financial analysis where by the impact on the profit with the changes in volume, selling price, cost and mix can be estimated. 03/27/15 24 S Kacker, IHM Mumbai
25. 25. SIGNIFICANCE OF BREAK EVEN CHART -It will show Variable Cost, Fixed Expenses, Total Cost. - Sales unit or Value of Sales can be known. - Profit or Loss can be known. - Margin of safety can be known. - Angle of incidence can be understood. - Break even point both in numbers or rupees can be ascertained. 03/27/15 25S Kacker, IHM Mumbai
26. 26. PURPOSE OF BREAK EVEN CHART →At what sales volume will any operation make money. →What will be the Profit/Loss at any given point of sale. →How much will be expenses at any given point of sale. 03/27/15 26S Kacker, IHM Mumbai
27. 27. 03/27/15 S Kacker, IHM Mumbai 27 →How will changes in Selling Price or Volume sold will affect profit. →Is it feasible to incur additional expenses like advertising, etc. →Should the operation expand or even start. PURPOSE OF BREAK EVEN CHART
28. 28. MOS is excess of normal or actual sales over break even sales. MOS = Actual Sales – Break even sales (Normal Sales) Like Profit Volume Ratio MOS can be expressed in : - Percentage - No of Units - Volume of sales Larger the MOS safer in the firm 03/27/15 28S Kacker, IHM Mumbai MARGIN OF SAFETY (MOS)
29. 29. Margin of safety can be increased by: 1. Decreasing the fixed expenses 2. Decreasing the variable costs 3. Increasing the selling price 4. Increasing the volume of sale 5. OR Effect of all the above 03/27/15 29S Kacker, IHM Mumbai
30. 30. MOS = Actual Sales – Breakeven Sales = Budgeted Sales – Breakeven Sales = Profit___ P/V Ratio = Profit C/S MOS Ratio = Actual Sales – Break even Sales Actual Sales 03/27/15 30S Kacker, IHM Mumbai
31. 31. Cost, Volume, Profit Relation (CVP Relation) Profit depends on various factors 1. Cost of manufacture 2. Volume of sales 3. Selling Price of products All these are interconnected. 03/27/15 31S Kacker, IHM Mumbai
32. 32. Cost- Volume Profit analysis It measures variations in cost with variations in volume. Importance of CVP analysis 1. It helps in Profit Planning 2. It helps in making Budgets 3. Making decisions for Sales etc. 03/27/15 32S Kacker, IHM Mumbai
33. 33. Profit – Volume Ratio It studies the profitability of operations It establishes the relationship between contribution and sales Comparison of P/V Ratio of different dishes can be made to find out which item is profitable. 03/27/15 33S Kacker, IHM Mumbai
34. 34. 03/27/15 S Kacker, IHM Mumbai 34 High the P/V ratio – more profit Lower the P/V ratio – less profit Profit – Volume Ratio
35. 35. P/V Ratio can be increased by increasing the SP/Cover or Decreasing Fixed and Variable Cost Variable Ratio = VC_ (Variable Cost Ratio) SP 03/27/15 35 S Kacker, IHM Mumbai
36. 36. 03/27/15 S Kacker, IHM Mumbai 36 Profit Volume Ratio = 1 - VC (Contribution Ratio) SP (Marginal income Ratio) = C/S percentage = Contribution x 100 Sales = Sales – VC x 100 Sales
37. 37. Problem Selling Price = 50 Rs Variable Cost = 5 Rs/Unit Fixed Cost = 9,00,000 Calculate : 1) BEP 2) Turn over to earn profit of Rs 2,25,000 3) MOS available on earning a profit of 2,25,000 03/27/15 37S Kacker, IHM Mumbai
38. 38. Problem Fixed Cost = Rs 5,000 Variable cost = Rs 10 unit SP = 20 unit Sales Volume = 750 units Find BEP 03/27/15 38S Kacker, IHM Mumbai
39. 39. Problem Calculate BEP SP =Rs 100.unit VC = Rs 80/unit Contribution = 20 unit FE = 10,00,000 03/27/15 39S Kacker, IHM Mumbai
40. 40. Problem SP/Cover VC/Cover Food Cost Rs 10 Labor Cost Rs 7 Overhead cost Rs 7 Fixed Cost Rs 1,50,000 Calculate – 1. Contribution 2. BE Sales 3. Sales required to earn profit of 2,80,000 03/27/15 40S Kacker, IHM Mumbai
41. 41. Problem Cost figures of a restaurant are given below Fixed Cost = Rs 18,000 No of Covers = 200 to 2000 Average check = Rs 20 Variable Cost = 25 % of sales Calculate = BEP 03/27/15 41S Kacker, IHM Mumbai
42. 42. Problem The Everest Restaurant has fixed cost of Rs 1,50,000 per month and serves to 1,000 covers. Its average check is Rs 40 of which 40% is needed to pay for the restaurant’s variable cost. Calculate BE sales. 03/27/15 42S Kacker, IHM Mumbai