Unit-4 Marginal Costing

Neeraj BhandariBBA- II Term

Marginal costing

Marginal costing is the additional cost incurred for an increase in one additional unit of output.

Marginal costing is also known variable costing.

Marginal costing

For an increase in one additional unit of output, only variable cost increase and fixed cost remains unchanged. Therefore an additional cost incurred for an increase in one additional unit of output is nothing but variable cost only.

Marginal cost

If variable cost per unit Rs.4 and total fixed cost is Rs.5000. therefore, total cost of producing 1000 units of output = V.C+F.C =(1000x4)+5000=9000. if one additional unit is produced beyond 1000 units(i.e, 1001 units), then (1001x4)+5000=9004. hence, the additional cost incurred for producing one additional unit=9004-9000=4 Rs. This additional cost Rs. 4 incurred for producing one additional unit is the marginal cost

Assumptions of marginal costing

All elements of cost , product, administration, selling & distributing can be divided into fixed & variable component.

Variable cost per unit will be considered fixed. the selling price per unit remains unchanged at all

levels of activity fixed cost remain unchanged for entire volume The volume of production affects the costs

Advantage of marginal costing

Helps to management fixation of selling price,

It assists in determining break-even-point ,

helps to management in selecting of product mix

helps taking a decision a new product in market

COST VOLUME PROFIT ANALYSIS

CVP analysis refers to the study of the effect on profit due to the change in cost and volume of output.

Relationship among cost, volume & Profit

COST VOLUME PROFIT ANALYSIS

Cost volume profit (CVP) analysis is an important tool that provides management with useful information for managerial planning and decision making on

(a) selling price (b) sales volume (c) variable cost (d) fixed cost

Techniques of CVP analysis

1. Contribution (C=S-V) 2. profit volume analysis ( P/V Ratio) 3. Break-even analysis (B.E.P)

Contribution

“ difference between sales and variable cost or marginal cost of sales”

Contribution = sales – variable cost Contribution = fixed cost + profit (-

loss)

Marginal cost equation

Sales – variable cost = contribution Sales = variable cost + contribution Sales – variable cost = fixed cost +/-

profit/loss

S-V = F+P

Profit volume ratio

1P/V RATIO = CONTRIBUTION/ SALES X 100 OR

SALES – VARIABLE COST/ SALES X 100

P/V RATIO = FIXED COST + PROFIT/SALES X 100

Break-even analysis

Break even analysis indicates at what level cost and revenue are in equilibrium

A technique of determining the level of operation where total revenue equal total expenses

Break-even point

‘Point of sales volume at which total revenue is equal to the total cost.

‘The point of no profit no loss’

Break even chart

Break-even point

B.E.P (unit) = fixed cost/ contribution per unit

Break-even-sales (B.E.P in sales) = fixed cost x sales/ contribution.

B.E.P = FIXED COST/ P/V RATIO,

Margin of safety

MOS is level of sales made above the BEP. MOS is the excess of actual sales over BEPS; difference between sales at a given activity and sales at break even point. the size of MOS indicates soundness of a business

MOS= Actual sales- B.E.P. Sales MOS = Profit /p/v ratio

MOS

Differential costing and incremental costing

Differential cost: Differential cost is the change in cost due to change in activity from one level to another. If the change increase the cost , it will be called incremental cost. If these is decrease in cost the difference is known as decrement cost

Differential costing and incremental costing

For achieving business objectives to maximize the profit, the management should evaluate these differential costs. Differential costing are considered by the management as decision making cost.

Thank you for marginal costing