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    Marginal CostingBy-

    Anmol Dhar- 022

    Nand Kishore Bodu-011Arpit Mishra-60

    Nitichandra Ingle-38

    Praveen Kumar-049

    Deepak M.-054

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    Definition of Marginal Cost

    Marginal cost is the additional cost of producing anadditional unit of a product.

    According to I.C.M.A. London as the amount to any givenvolume of output by which aggregate costs are changed ifthe volume of output is increased or decreased by one unit.In practice, this is measured by the total variable costattributable to one unit.

    Thus, Marginal Cost = Prime cost+ Total variable overheads

    (or)

    Total cost Fixed cost.

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    Definition of Marginal Costing

    Marginal costing is a costing technique in which onlyvariable manufacturing costs are considered and usedwhile valuing inventories and determining the Cost OfGoods Sold(COGS).

    These costs include direct material direct labor andvariable factory overhead and these are assigned toproduct

    Fixed factory Overheads are not considered

    Fixed manufacturing costs are treated as period costs inmarginal costing.

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    Features of Marginal Costing

    1.Marginal costing is a technique of control or decision

    making.

    2. Under marginal costing the total cost is classified as fixed

    and variable cost.

    3. Fixed costs are treated as period cost and charged to profit

    and loss a/c for the period for which they are incurred.

    4. The Variable costs are regarded as the costs of the

    products.

    5. The stock of finished goods and work-in-progress are

    valued at marginal costs only.

    6. Prices are determined on the basis of marginal cost.

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    Continues..

    Marginal costing is a technique of costing fully oriented

    towards managerial decision making and control.

    Marginal Costing being a technique can be used inconjunction with any method of cost ascertainment.

    It can be used in combination with other techniques

    such as budgeting and standard costing.

    Marginal costing is helpful in determining theprofitability of products, departments, processes and

    cost centers.

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    MARGINAL COST STATEMENT

    sales Description Amount

    (Rs)

    Amount

    (Rs)Less Variable Production Cost YYY

    Direct Material Cost YYY

    Direct Labor Cost YYY

    Variable Manufacturing Overhead YYY

    Costs of Good Manufactured YYY

    Add Beginning Inventory YYY

    Cost of Goods Available for Sale YYY

    Less Closing Inventory YYY

    Cost of Goods Sold YYY

    Marginal Contribution YYY

    Less Fixed manufacturing Overhead YYY

    Variable selling and Administrative Expenses YYY

    Fixed Selling and Administrative Expenses YYY

    Net Income YYY

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    MARGINAL COST - Example

    sales Description X Y Z Total

    Sales(1) 40,000 54000 78000 172000Less Variable Production Cost

    Direct Material Cost 12000 15000 20000 47000

    Direct Labor Cost 5000 7000 9000 21000

    Direct Expenses 1000 1500 2000 4500

    Variable OverheadFactory 5000 6500 11000 22500

    Administration 2000 3000 5000 10000

    Selling and Distribution 2500 2500 4000 9000

    Total (2) 27500 35500 51000 114000

    Contribution (1-2) 12500 18500 27000 58000

    Less Fixed manufacturing Overhead

    Factory 11000

    Selling and Distribution 4500

    Administrative Expenses 14500 30000

    Profit 28000

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    Observations

    > It can be observed that only the direct cost + Variable

    Overheads will be observed into the cost of product

    >The balance amount called Contribution will be used in

    meeting fixe cost and any amount after meting the fixed

    cost will be the profit of the concern

    >In marginal costing Fixed Cost peer Unit wont be

    computed to arrive at the product profitability i.e.

    Selling price of product > the marginal cost

    >In marginal costing fixed overheads are charged direct to

    the costing profit and loss account.

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    Decision Making Indicators

    The following are the basic decision making indicators inmarginal costing

    1.Profit Volume Ratio(PV ratio)

    2.Break- Even Point(BEP)

    3.Margin of Safety (MOS)

    4.Indifference point

    5.Shutdown Point

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    Cost-Volume-profit analysis

    The Profit Volume ratio is the relationship betweencontribution and sales value

    Formula : Contribution/Sales x 100

    It is used to measure the effect of factor changes &management decision alternatives on profits. Factors likeselling prices, change in variable or fixed cost etc.,

    Changes in selling price.

    a) If selling price is increased, P/V ratio increases & rate offixed cost recovery is increased. BEP declines

    b) If selling price is decreased, P/V ratio decreases & rate of

    fixed cost recovery declines. BEP increases

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    Changes in variable costs:

    a) Increase in variable cost, P/V ratio decreases & rateof fixed cost recovery is slower, BEP moves higher.

    b) Decrease in variable cost, P/V ratio increases &rate of fixed cost recovery increases, BEP moveslower.

    Changes in Fixed Cost:

    No change on P/V ratioSignificance:

    PV ratio is considered to be the basic indicator of theprofitability of the business

    It is used to compute variable cost for any volume ofsale

    To decide the most profitable sales mix

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    Breakeven Analysis

    Introduction

    In this lesson, we will discuss in detail the highlightsassociated with cost function and cost relations with theproduction and distribution system of an economic entity.

    To assist planning and decision making, managementshould know not only the budgeted profit, but also:

    the output and sales level at which there would neitherprofit nor loss (break-even point)

    the amount by which actual sales can fall below thebudgeted sales level, without a loss being incurred (themargin of safety)

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    Breakeven Analysis Equations

    Sales Marginal cost = Contribution ......(1)

    Fixed cost + Profit = Contribution ......(2)

    Sales Marginal cost = Fixed cost + Profit......

    (3) P/V Ratio (or C/S Ratio)

    =Contribution/Sales.....(4)

    (or)

    Contribution = Sales x P/V ratio...... (5)

    (or)

    Sales =Contribution/ P/V Ratio......(6)

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    Important Formula

    1. Contribution = Sales (Volume/Per unit) Variable Cost.2. Profit-Volume Ratio= Contribution/ Sales

    (or) P/V Ratio= Change in Profit/Change in Sales

    3. Break Even Point (Units) = Fixed Cost/ Contribution

    Break Even Point (Sales)= Fixed Cost/ P/V Ratio4. Margin of safety = Actual Sales Break Even Sales

    5. Sales for required profit= Fixed Cost + Required Profit

    P/V Ratio

    6. Profit for given Sales= Contribution-Fixed CostContribution= Given Sales x P/V Ratio

    7. Fixed Cost = Contribution - Profit

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    Advantages of Marginal Costing

    1. Simplicity

    2. Stock valuation

    3. Meaningful reporting

    4. Fixation of Selling Price5. Profit planning.

    6. Cost control and cost reduction.

    7. Pricing policy.

    8. Helpful to management.

    9. Production Planning

    10. Make or Buy Decisions

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    Limitations of Marginal Costing

    1. Classification of cost

    2. Not suitable for external reporting.

    3. Lack of log-term perspective.

    4. Under valuation of stock

    5. Automation Lack of Advancement

    6. Production aspect is ignored.

    7. Not applicable in all types of business.

    8. Misleading picture -Assumptions

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    Assumptions of Marginal Costing

    1. All costs can be classified into two categories Fixed and

    Variable

    2. Fixed costs remain constant at all levels of activity

    3. Variable costs vary in total, but remain constant per unit

    4. Level of efficiency of operations is uniform

    5. Product risk remains unaltered, unless specified otherwise.

    6. Selling price remains constant at different levels of activity.

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