Shalini Project Marginal Costing

8/9/2019 Shalini Project Marginal Costing

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THE STUDY ON MARGINAL COSTING

1.1 INTRODUCTION ABOUT THE INTERSHIP

The project mainly focused on capital structure analysis at Nandini Hi-tech product Plant the

term marginal costing analysis refers to the relationship between total costs Such as fixed

cost !ariable cost sales marginal costing refers to the ascertainment of "arginal cost and

other effect on profit of changes in type of output by differentiating #etween fixed and

!ariable cost$ "arginal costing is not a separate costing it is only

Techni%ue used by accountant to aid management decision$ &t is also called as 'direct

BGS INSTITUTE OF TECHNOLOGY Page 1


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costing( in )S* this techni%ue of costing is also +nown as '!ariable costing

',ifferential costing( or out-of-costing$

Since the re!enue is e%ual to total cost the business entity earns no profit nor does it incur

loss$ &f the sales !olume exceeds the brea+ e!en !olume e!en by one unit the company earns

profit$ The amount of profit is e%ual to the product of excess units sold co!er and abo!e

brea+- e!en !olume. and unit contribution$ &n the same way is the sales !olume falls below

the brea+-e!en analysis does not aim only at finding out the #rea+-e!en point$ /ather it aims

at analy0ing a number of other things besides the computation of brea+-e!en point. such as

P12 ratio *ngle of incidence "argin of safety profit or 3oss *bsorbed and )nabsorbed

fixed costs ect$ Therefore #rea+-e!en analysis in its broader sense refers to the analysis of

impact of costs price and !olume and profit$ &n other words it establishes the relationship

between cost price !olume and profit$

This project reports contains fi!e chapters which begins with need for study 4bjecti!es andscope of the study research methodology used e

The second chapter it co!ers industry profile and company profile which includes promoters

information !ision mission and %uality of the product competitors information S54T

analysis financial statement ect$

The third chapter theoretical bac+ground of the study it includes elaborati!e

&nformation on the subject chosen for better understanding and usage in the analysis$

The fourth chapter comprehensi!e co!erage of analysis and interpretation of the data

collected with rele!ant tablets and graphs$ /esults obtained by using statistical tools must beincluded$



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The fifth chapter deals with the summary of findings conclusion and suggestion

recommendations$

'Nandini hi-tech product plant the mil+ procurement by the co-operati!es in 6arnata+a has

steadily o!er the years due to the efforts and policies fa!ouring mil+ production$ 7xisting

infrastructure of the mil+ co-operati!e in the state was found to be insufficient for handling

the excess mil+ in order to meet the increased processing re%uirement 6arnata+a mil+

production 6"8.$in consultation with national dairy de!elopment boardN,##.concei!ed

to setup a product dairy of 9::T3P, with ;:"TP, power plant in the years ; mil+ unions in 6arnata+a$ The project was entrusted to

N,,# on turn+ey exaction basis$

& am doing project in manufacturing sector with respect to Nandini hi-tech product plant

?H*NN*/*@*P*T*N* & hope this report will be extremely useful for those it is mean$

?onstructi!e and healthy suggestions for impro!ement of the report will be great fully

appreciate$

>$< T4P&? ?H4S7N 84/ TH7 ST),@

The topic selected for analysis of marginal costing or cost !olume and profit analysis at

Nandini hi-tech production plant$ The !ariation of cost is also analy0ed with their effects on

the o!erall wor+ing or unit in the present scenario Nandini hi-tech product plant one of the

leading producers of mil+ product and facing the problem of huge cost of production$ The

companies is incurred more capital expenses and insufficiently of the raw material$ To

increase profit the company has to increase the sales$ &t should note #7P under !arious

situation of changing sales mix price and cost if has to study what are the most and least

profitable product and it to forecast the impact on profit when sales mix is charged$

>$; N77, 84/ TH7 ST),@

The need of the study helps the company it identity their position by which the company can

increase or decrease the total cost of production$ &t also helps the company to identify and

offer a minimum rate of product price according to the expectations of the customer so that



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the companys sales le!el will get increased$ Hence it is prepared to understand the study on

marginal$

>$9 4#A7?T&27S 48 TH7 ST),@

B To understand the financial position of the company

B To determine the selling price which will gi!e the desired profitC

B To determine the sales !olume to earn a desired profit or return on capital employed$

B To identity the brea+ e!en sales contribution margin ratio margin of safety with

respect to Nandini hi-tech plant

B To measures the degree of le!erages with respect to Nandini hi-tech$

B To analy0e the trend of margin costing with respect to Nandini hi-tech plant

>$= S?4P7 48 TH7 ST),@

B The study is mainly concentrated on cost !olume and profit analysis of the

company the company cost control will influence more on the le!el of cost management of

the company$

B The study is on the three years sales of the company which will gi!e a clear picture

about the minimum sales re%uire to achie!e brea+e!en$ The study is on !ariable cost

contribution fixed cost P 2 ratio brea+e!en sales margin of safety prating le!erage is ;

years$

B This study is limited only to Nandini hi-tech product plant and analysis of marginal

costing is only for 9years that is from :>191> to ;>1;19$

B To understand the importance of the determination of brea+-e!en-point with respect to

changes in sales and re!enue$

>$D "7TH4,434E@

/esearch methodology describes the !arious steps that are generally adopted by a

researcher in studying the research problem along with the logic behind them$ ,ata isimportant for any study has been obtained from the secondary data$ The secondary data can



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be collected from the financial statement li+e final account annual report N*N,&N& H&-

T7?H P/4,)?T P3*NT$

>$F 3&T7/*T)/7 /72&75

3iterature re!iew is most important to identify the problem of the study which can be sol!ed

by collection of data$ &t is !ery important to +now that the wor+ is doing by researcher in a

research should not be repeated again$ 3iterature re!iew obser!ed about the wor+ that it is

doing is repeating unintentionally$ &t also helps to a!oid the mista+es which already done by

another one$ So researcher can impro!e the research is depends on the past +nowledge and

not includes a part of +nowledge$ * well created re!iew establishes creditability of the

researcher of the study so he can get the entire benefits of his wor+$

This research study was conducted by " SH&2* 6)"*/ during the year :->>

titled( * P/4A7?T /7P4/T 4N "*/E&N*3 ?4ST&NE( at #72?4N 5*@4/S$p!t$ltd

during the research he found the *berdeens Spend *nalysis #enchmar+ing Study G


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reduction in manual correction of spend cleansed and classified

;$ F; rate compliance to contractual agreement$

The goal of this primer has been to describe the major principles concepts and methods for

doing economic analysis of highway projects$ The co!erage of these subjects has been

necessary brief$ 8or the interested reader a wealth of additional information from publicly

accessible sources$

#enefit #7P analysis is the most comprehensi!e method to e!aluate the reasonableness of

highway projects in economic terms$ &n some cases when it is clear that a project must be

underta+en regardless of its cost$ e$g$ a critical bridge on a interstate highway must be

repaired or replaced in +ind.$

This research study was conducted by #alachandru ,hananjaya during the year


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;$ /educing raw material usage in production down time$

?4N?3)S&4N

&n this study is attempted to made analy0e the #7P analysis of the simple unit$ Since the

Nirani Sugar$ P!t$ltd is facing hea!y competition in an around area of the region$ &t is

essential to focus on the aspect of the marginal costing$

#@ /)SS H7*,37@

This article focuses on costK costs are the monetary !alues of the resources which ha!e to be

used for the production$ ?ost control can defined as getting the best results with the lowest

offering of resources$ The management instrument that can be used to control the costs of a

company are$ #udgeting #alanced Scorecard #enchmar+ing *cti!ity-#ased "anagement$

These instruments can be used in combination with each other because they can support the

decisions made by management$

#@ S4/&N #/&?&)& S4/&N73 ?*P)SN7*N)$J 3&"&T*T&4N 48 TH7 ST),@



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The study is based on secondary data and the data a!ailable from the annual reports of

the company$

*s data was confined to project did not allow for the in depth study regarding the

performance of the company$

*s it is an external study conclusion and suggestions are not ultimate and are base on

personal judgement and the ability of the researcher to understand the concept$

The study is conducted only on determination of marginal costing

&t assumes that the fixed costs are constant

&t multi-product companies it assumes that the relati!e portions of each product sold

and produced are constant$

&t assume that the %uantity of goods produced is e%ual to the %uantity of goods sold

&t assumes a!erage !ariable costs are constant per unit of output$

"arginal costing is only a supply side analysis as it tells you nothing about what

sales are actually li+ely to be for the product at these !arious prices$

2.1 INDUSTRY PROFILE

History of Milk I!"stry#

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*round D:-F: years bac+ at the time of #ritish rule the farmers of Eujarat were one

of the best mil+ producing state in &ndia$ There was a #ritish agent named Polson who was

deciding the price of the mil+$ The farmers were not getting right price of their production$

This harassment continued for years$ 3ater the farmers organi0ed themsel!es to a!oid this

harassment$ The farmers complained to Sardar 2allabhai Patel about this and decided not to

sell mil+ to the #ritish military people$ This is how the concept of union came into picture$

8rom >I9F-9J Eujarat started selling mil+ directly to the consumer not gi!ing mil+ to

#ritish people our late Prime "inister 3albahaddurshastry thought to from same type of

unions throughout &ndia$ Since then operation flood came into existence$ &n >IF= 6arnata+a

also implemented the !illage co-operati!e societies$

O$%r&tio Floo!#

National ,airy ,e!elopment #oard N,,#. was found in >ID=$ ,rL 2arghese

6urian the founder chairman of N,,# after which dairy de!elopment became a regular

organi0ation and the operation flood program was concei!ed by the N,,#$

O$%r&tio Floo! P'&s% 1#

&t was launched in >IF: following in an agreement with world food program$ The first

phase of operation flood laid the foundation for &ndias modern dairy industry that ultimately

met the countrys need for mil+ and mil+ products$

O$%r&tio Floo! P'&s% 2#

&t was implemented between >IJ> and >IJ=$ &t integrated the dairy de!elopment

projects being implemented with the aid of 5orld #an+$

O$%r&tio Floo! P'&s% (#

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&t aimed at ensuring that the co-operati!e organi0ations become self-sustaining$ This

program aimed at substantial expansion of the dairy processing and mar+eting facilities with

extended mil+ procurement infrastructure and professionali0ation of dairy de!elopment$

,airy farmers are highly dependent upon ha!ing a local processing facility to buy

their product because mil+ rapidly deteriorates prior to processing dairy farmers are highly

dependent upon ha!ing a local processing facility to buy their product because mil+ rapidly

deteriorates prior to processing$ This has encouraged the de!elopment of co-operati!e in

dairy sector$ ?o-operati!e rules usually re%uire the compulsory purchase of all member

productsK hence by becoming members of a local co-operati!e dairy farmers ha!e been able

to ensure an outlet for their highly perishable product$

N&tio&l D&iry D%)%lo$*%t Bo&r!

Itro!"+tio#

The go!ernment of &ndia constituted the 'National ,airy ,e!elopment #oard( in the year

>ID= Shri$ 3albahadurShastry initiated the setting up of N,,#$ The board is registered

under the societys registration act and public trust at the head office is at *nand and is

organi0ation in to I functional di!isions$

O,-%+ti)%s of N&tio&l D&iry D%)%lo$*%t Bo&r!

To sponsor promote manage ac%uire construct control any plant or wor+ which promotes

or ad!ances the projects of general public utility reactions to dairying$

>$ To ma+e a!ailable on re%uest information ser!ices to increase production

de!elopment to release to production and mar+eting of agricultural and food products$


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increasing mil+ dairying achie!ed in the procurement with an almost emphasis on the %uality

and in the process conser!e the socio economic interest of rural mil+ producers the

go!ernment of 6arnata+a through 6"8 has proposed$

4peration flood came to third phase >IJD-I9. after successfully completing first

phase >IJ>-J=. the product operation flood laid stress on setting up rural mil+ producers co-

operati!e organi0ation to produce and mar+et the mil+ on one than mar+et technical input for

mil+ production the other hand$

0orl! to$ *ilk $ro!"+i +o"tri%s#

COUNTRY3S 2411 51444MT6

&N,&* >=::::

)N&T7, ST*T7S JJFDJ::

?H&N* ;>FJ:::

/)SS&* ;>J:9I::

"7&?4 >>:F:::

)6*&N7 >:J>per cent of mil+ buffaloes are +ept in towns



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and cities$ )$P$ is the largest producer of mil+ followed by Punjab #ihar *ndhra Pradesh and

/ajasthan$ "$P$ and 4rissa account for low production$

T&,l% (.2# Pro!"+tio of Milk i I!i& 51444 To%s6

@ear ?ow mil+ #uffalo mil+ Eoat mil+ Total

9JI=


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S'%tti'&lly9 C.R.P&t&.

COMPANY PROFILE

?4"4*N@ N*"7O 6"8 Nandini Hi-Tech Product Plant



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Shettihally

#$"$/oad

?hannarayapatna

Hassan ,ist$.

-=F;>>D

,&/7?T4/O Eo!indegowda

N*T)/7 48 #)S&N7SSO "il+ based powder )HT "il+

?o-operati!e unit$

T@P7 48 #)S&N7SSO ?o-operati!e units include Pri!ate *gencies$

T73-N4O :J>F


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5hole mil+ powder5"P.

?*P*?&T@ 48 P3*NTO "il+ processing-9:: T3P,

"il+ powder production-;:"TP,

#utter production->="TP,

Ehee production-


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BAC7ROUND#

The mil+ procurement by the co-operati!es in 6arnata+a has steadily increased o!er the years

due to the efforts and policies fa!ouring mil+ production$ 7xisting infrastructure of the mil+

co-operati!es in the state was found to be insufficient for handling the excess mil+$ &n order

to meet the increased processing re%uirement 6arnata+a "il+ 8ederation 6"8. in

consultation with National ,airy ,e!elopment #oard N,,#. concei!ed to setup a product

dairy of 9:: T3P, with ;: "TP, powder plant in the year ; mil+ unions in 6arnata+a$ The project was entrusted to N,,# on

turn+ey execution basis$

SAILENT FEATURES OF THE MIL7 PRODUCTS#

7ffluent treatment plant using en!ironment friendly anaerobic technology$

States of art automation ,?S1S?*,*. for mil+ processing and powder

manufacturing and energy efficient e%uipment and machineries adhering to H*??P

standards along with ad!anced dairy transaction processing system 7/P.$

8ully automated refrigeration plant using en!ironment friendly ammonia li%uid o!er

feed system with &?7 silo$

The project has been setup in a 33P, 3a+h liter1day.

2.( Pro*ot%rs#



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Eo!ernment of 6arnata+a$

,irector of NHPP Honnayya Shetty and co-directors$

7mployees of the organi0ation$

8ormers$

2.: ;ISION#

'To be the leading producer of mil+ products by introducing ad!anced %uality enhancement

techni%ues$ To pro!ide fresh %uality products competiti!e prices there by uplifting the

financial position of the rural mil+ producers$(

To ensure prosperity of the rural "il+ producers who are ultimate owners of the

8ederation$

To promote producers oriented !iable co-operati!e society to impart an impetus to the

rural income dairy producti!ity and rural employment$

To bridge a gap between price of mil+ procurement and sale price$

To de!elop business acumen in mar+eting and trading disciplines so as to ser!e

consumers with %uality mil+ gi!e a fillip to the income of mil+ producers$

To complete with "N?s and pri!ate ,airies with better %uality of mil+ and mil+

products in the process sustain in!incibility of co-operati!es$

MISSION#

'The mission is to become a leading concern in the mil+ products manufacturing by

implementing modern machinery e%uipments to pro!ide %uality mil+ products to the

customers$(

Procuring the raw mil+ from the local farmers at a fair price$

Pasteuri0ation and homogeni0ing of the procured raw mil+$

Heralding economic social and cultural prosperity in the li!es of our mil+ producer

members by promoting !ibrant self-sustaining and holistic co-operati!e dairy

de!elopment in 6arnata+a state$

Producing the other mil+ products$

Transporting the pasteuri0ed mil+ in !arious %uantities from processing plant to the

urban areas$

Supply mil+ to the consumer at a reasonable rate$

,e!eloping good infrastructure facilities$



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$ Tetra Pac+$


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?ows pure mil+ )HT processed bacteria free in a tamper- proof tetra pac+ which +eeps this

mil+ fresh for I: days without refrigeration until opened$ &t is a!ailable in =::ml ::mlat premium store across the country$ 4n *pril :; 9 - E44,3&87 S*37S T4)?H7,

=$;33pd all time high$

2. B"tt%r#

#utter ser!es as the balance wheel of the dairy industryK surplus mil+ is

con!erted into butter while during times of scarcity the mil+ intended for

butter ma+ing is used for more essential products$ &t is obtained by

churning cream gathering the fat into a compact mass and then wor+ing

it$ &t is a!ailable in


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(. '%%#

&t is the product obtained from surplus fat prepared from butter $&t is

Pac+ed in >=+g tin pac+s respecti!ely$ *nd in tan+er it will be sent for

Thirumala$ 8irstly license is obtained after which special grading is gi!en

then it is pac+ed$

'%% $&+k%t

:. Ski* *ilk $o/!%r#

"il+ powder is made from pure mil+K processed and pac+ed

hygienically $&t is a!ailable in year$

Milk $o/!%r $&+k%t#



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Pri+% t&,l%#

P/4,)?TS R)*NT&T@ P/&?7in /s.

E44, 3&87 "&36 >:: ml


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=::ml +g 6SH&/* #*E@*

S?H7"7 8/4" E42T.

*s per Eo!t standard

2.> Ar%&s of o$%r&tio#

Nandini Hi-Tech Product Plant is set up in a


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They ha!e procurement group contract !ehicles$

7gO mil+ tan+ers

(. MIL7 PROCESSIN

/aw mil+ reception doc+ ?ream separators

"il+ pastures

Stored tan+s

7lectronic mil+ tester and mil+ scan

:. PAC7AIN

E44, 3&87 "il+ pac+aging machine

8la!oured mil+ pac+aging machine Ehee pac+aging machine

Nandini "il+ powder

Nandini #utter

=. ENINEERIN

/eformation e%uipments

#oiler e%uipments

7ffluent treatment plants

7lectronic generation

>. MAR7ETIN

,istribution networ+

*gents

Parlours

T?,

5S,

?. DISTRIBUTION AND TRANSPORTATION

Truc+s

*uto

"obile !an

@. OTHER FACILITIES Security canteen facilities

Shift facilities- ; shift per day

Heat allowance

?old allowance

Production bloc+

*dministration bloc+

8uelling point

Earage bloc+

F"+tios of t'% $ro!"+tio !%$&rt*%t#



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?ollection of raw mil+ from different sources

Testing the recei!ed mil+ for %uality

5eighing

Processing

Pasteuri0ation

Storing mil+ and

Pac+ing mil+ pac+ing

MIL7 RECEPTION AND STORAE#

Two tan+er reception bays with a maximum capacity of ;::::ltr per hour are

pro!ided$ &t will be weighed and laboratory tested to chec+ temperature PH SN8

8at and *cidity$ Tan+er will be weighed at electronic weigh bridge 9: tons.$

&nstalled at the entrance gate$ /ecorded weighments are subse%uently transmitted to

the central control room$ *fter automatically agitating the mil+ for lab testing to

confirm to the re%uirements of temperature fat SN8 acidity ph$

&f the %uality of the mil+ is found acceptable the tan+er is ta+en for unloading$ The lab

test reports are also transmitted to the central control room$ )nloading of the tan+er is

done by connecting the hose pipe to the tan+er !al!e$ /aw mil+ flows through the

stain less steel desecration !essel and inline disc type strainer and is pumped by a

sanitary centrifugal pump$

Two mil+ processing lines each of capacity of


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Milk stor&%#

ORANISATION STRUCTURE


,irector

Eeneral "anager


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0OR7 FLO0 MODEL


"anager

7ngineering.

"anager

,airy.

,eputy

"anager

"anager

8inance.

"anager

"ar+eting.

"anager

System.

"anager

*dmin.

"anager

Purchase.

*dministratio

n 4fficer

*ssistant

"anager

*ssistant

,irector

*ssistant

"anager

*ccounts

4fficer

,eputy

"anager7ngineerin

*dmin

*ssist1

"ar+eting1

*dmin

*ssist

"anagers

4fficers

*ssistant

7ngineering

,airy

Super!isor

Technical

4fficers

*ssistant

"anager

*dministration

*ssistant

*ccount

*ssistant

System

4perators

Technician Technician

Primary mil+ producer

"il+ing

2illage dairy co-operati!e society

?hilling

Transportation

Security chec+"il+ /eception doc+Eood mil+ recei!edRuality chec+?hilling mil+Primary mil+ producerProcessingProduction SectionPac+ing Section


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2.@ Co*$%titors Ifor*&tio#

5&6 For oo! lif% *ilk#

Nestle a mil+ *")3 T**M* #ritannia etc$$


Ruality chec+ of information

,ispatch through transport !ehicle

Security chec+ *gents and consumers


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5,6 For B"tt%r#

Nestle

5+6 For '%%#

N42* pure Ehee Nestle 7!ery day *")3 Pure Ehee ?osmo!edascocos Ehee #io.

etc$$



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5!6For *ilk $o/!%r#

Nestle N&,4 4rganic !alley "illac &nfant dry mil+ etc$

*nother competitors are ,odla mil+ *ro+ya mil+$

2. S0OT ANALYSIS

S54T is an abbre!iation of four terms that is Strength 5ea+ness 4pportunities

and Threats$ S54T analysis is good for analy0ingan company and also it is a tool

for auditing an company and its en!ironment$ This analysis will gi!e a cross section

BGS INSTITUTE OF TECHNOLOGY Page 3!


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of the company$ &t is the first stage of planning and helps mar+eters to focus on +ey

issues$

STRENTH#

Nandini enjoys good brand image$

Nandini is a large procurement base$

6$"$8 is the huge infrastructure for processing$

6"8 has the ?ompetiti!e prices$

Nandini Product dairies different range of product$

6$"$8 has wide distribution networ+ leads to regular and timely supply$

6$"$8 enjoys highest mar+et shares in the pac+ed mil+ segment$

0EA7NESS#

Perishable commodity$

3ac+ of professional man power$

#ureaucratic method of functions$

,ue to bad smell that persist causes low sales$

OPPORTUNITIES#

Huge mar+et demand$There is scope for de!eloping in new area$

*!ailability of buffalo mil+-&mpro!es mar+et mil+ %uality$

Predominant of loose mil+ segment di!ide appropriate strategies$

THREATS#

&ncrease of competitors mil+ !endors unorganised sector$

8lexibility in commission structure$

No entry barriers for pri!ate players$

3ow le!el of consumer awareness$

Persuade benefits of competing brand$

2.14 F"t"r% ro/t' $ros$%+t"s#

Ehee production !arious %uantities li+e >:: ::: "3 and = +g Tins$

*dditional ;: "T metric tone. production plant will be establish$

,isco!ering new mar+eting areas$

7xport the product$

&ntroduce sterili0es fla!our mil+$

,airy weightiness$



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&ntroduce !alue added product$

2.11 FINANCIAL STATEMENT#

BALANCE SHEET AS ON (1(241:

3&*#&3&T&7S 1:241( to

(1(241:

1:241( to

(1(241:

*SS7TS 1:241( to

(1(241:

1:241( t

(1(241

C&$it&l &+ Fi%! Ass%ts# ?19219>=9:

Lo&s 5Li&,ility6 (=9?94=91(= ?apital wor+-in-

progress

;>;I>=I

Secured loans ;:9F>DF>>

C"rr%t Li&,iliti%s Tetra Pac+-Plant

"achinery

=I99J:F@9149:?



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4utstanding

3iability

;II>=IJ ?losing Stoc+ JF=JI9JD

Salary /eco!eries ;:;9


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C"rr%t li&,iliti%s 29=>9>@9>>= ,epreciation

reser!e

>F=I:D=JIID=: C"rr%t &ss%ts 1294>94?9??

7", and security

deposits

I>>:=F

?losing IJ;>I;


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THEORETICAL BAC7ROUND OF THE STUDY(.1 BAC7ROUND OF THE STUDY

"arginal costing as one of the tools of management accounting helps management in ma+ing

certain decisions$ &t pro!ides management with information regarding the beha!iour of cost and be

incidence of such costs on the profitability of an underta+ing marginal costing is defined as 'the

ascertainment of marginal costs and of the effect on profit of changes in !olume or type of output by

differentiating between fixed costs and !ariable costs($ "arginal costing is not a separate costing it is

only techni%ue used by accountants to aid management decision$ &t is also called as ',irect costing(

in )S* this techni%ue of costing is also +nown as '2ariable costing( ',ifferential costing or 4ut-of-

costing($



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*ccording to ?&"* terminology( marginal costing is the ascertainment of marginal costs and

of the effect on profit of changes in !olume or type of output by differentiating between fixed costs

and !ariable cost in this techni%ue of coasting only !ariable costs are charged to operation processes

or products lea!ing all indirect costs to be written off against profits in the period in which they arise($

Thus marginal costing is the accounting system in which !ariable costs is charged to cost

units and fixed costs of the period are written off in full against the aggregate contribution$ &t special

!alue is in decision ma+ing$ &t is a techni%ue of applying the existing methods in a manner in order to

bring out the relationship between profit and !olume of output$

Meaning of marginal costM&ri&l Cost# The term "arginal ?ost refers to the amount at any gi!en !olume of output by which

the aggregate costs are charged if the !olume of output is changed by one unit$ *ccordingly it means

that the added or additional cost of an extra unit of output$"arginal cost may also be defined as the Ucost of producing one additional unit of product$U Thus the

concept marginal cost indicates where!er there is a change in the !olume of outputK certainly there

will be some change in the total cost$ &t is concerned with the changes in !ariable costs$ 8ixed cost is

treated as a period cost and is transferred to Profit and 3oss *ccount$

M&ri&l Costi#

"arginal ?osting may be defined as Uthe ascertainment by differentiating

#etween fixed cost and !ariable cost of marginal cost and of the effect on profit of changes in !olume

or type of output$U 5ith marginal costing procedure costs are separated into fixed and !ariable cost$

*ccording to A$ #atty "arginal costing is Ua techni%ue of cost accounting pays special attention to the

beha!iour of costs with changes in the !olume of output$U This definition lays emphasis on the

ascertainment of marginal costs and also the effect of changes in !olume or type of output on the

companyVs profit$

(.2 FEATURES OF MARINAL COSTIN

?osts are separated in to the fixed and !ariable elements and semi !ariable costs are

also differentiated li+ewise$

4nly the !ariable costs are ta+en in to account for computing the !alue if stoc+s of

wor+ in progress and finished products$ 8ixed costs are charged off to re!enue wholly during the period in which they are

incurred and are not ta+en in to account for !aluing product cost1in!entories$

Process may be based on marginal costs and contribution but in normal circumstances

prices would co!er costs in total$

&t combines the techni%ue of cost recording and cost reporting$

Profitability of departments or products in determined in items of marginal

contribution$

The unit of a product means the a!erage !ariable costs of manufacturing the product$

*ll elements of costs are classified into fixed and !ariable costs$

"arginal costing is a techni%ue of cost control and decision ma+ing$



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2ariable costs are charged as the cost of production$

2aluation of stoc+ of wor+ in progress and finished goods is done on the basis of

!ariable costs$

Profit is calculated by deducting the fixed cost from the contribution i$e$ excess of

selling price o!er marginal cost of sales$

Profitability of !arious le!els of acti!ity is determined by cost !olume profit analysis$

;$; *,2*NT*E7S 48 "*/E&N*3 ?4ST&NE

?ost-!olume profit relationship data wanted for profit planning purpose is readily

obtained from the regular accounting statements$ Hence management does not ha!e to

wor+ with two separate set of data to the other$ The profit for a period is not affected by charges in absorption of fixed expenses

resulting from building or reducing in!entory$ 4ther things reaming e%ual e$g$

selling prices costs sales mix.

Practical cost control is greatly facilitated $by a!oiding arbitrary allocation sof fixed

o!erheads efforts can be concentrated on maintaining a uniform and consistent

marginal cost useful to the !arious le!els of management$

"arginal costing is simple to understand and operateK it can be combined with other

forms of costing such as budgetary costing standard costing without much difficulty$ &n marginal costing fixed o!erheads are not charged to the cost of production due to

this the effect of !arying charges per unit is a!oided$

&t helpsin short-term profit planning by brea+-e!en charts and profit graphs$

?omparati!e profitability can be easily assessed and brought to the notice of the

management for decision-ma+ing$

&t pre!ents the illogical carry-forward in stoc+-!aluation of some proportion of current

years fixed o!erheads$

&t eliminates large balances left in o!erheads control accounts which indicate thedifficulty of ascertaining an accurate o!erheads reco!ery rte$

"anufacturing cost and income statement in the direct costing is in use$

Shutdown or continue decisions or alternati!e use of production facilities$

/etain or replace a machine$

,ecisions as to whether to sell in the export mar+et or in the home mar+et$

The effect of alternati!e sales or production policies can be more readily appreciated

and assessed and decisions ta+en will yield the maximum return to the business$

5hether to expand or contract$

Product mix decisions li+e for example O Selection of optimal product mixK



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Product substitutionK

Product discontinuance$

#rea+-7!en *nalysis$

(.: Li*it&tios of M&ri&l Costi

&t may be !ery difficult to segregation of all costs into fixed and !ariable costs$

"arginal ?osting techni%ue cannot be suitable for all type of industries$ 8or example

it is difficult to apply in ship-building contract industries etc$

The elimination of fixed o!erheads leads to difficulty in determination of selling

price$

&t assumes that the fixed costs are controllable but in the long run all costs are

!ariable$

"arginal ?osting does not pro!ide any standard for the e!aluation of performance

which is pro!ided by standard costing and budgetary control$

5ith the de!elopment of ad!anced technology fixed expenses are proportionally

increased$ Therefore the exclusion of fixed cost is less effecti!e$

)nder marginal costing elimination of fixed costs results in the under !aluation of

stoc+ of wor+ in progress and finished goods$ &t will reflect in true profit$

"arginal ?osting focuses its attention on sales aspect$ *ccordingly contribution and

profits are determined on the basis of sales !olume$ &t does not consider other

functional aspects$

)nder "arginal ?osting semi !ariable and semi fixed costs cannot be segregated

accurately$

&t is !ery difficult to segregate all costs into fixed and !ariable costs !ery clearly since

all costs are !ariable in the long run$ Hence such segregation sometimes may gi!e

misleading results$

The closing stoc+ consists of !ariable costs only and ignores fixed costs$ This gi!es

distorted picture of profits$

Semi-!ariable costs are not considered in the analysis$

There is problem of under or o!er-reco!ery of o!erheads$ Since !ariable costs are

apportioned on estimated basis and not on the actual$

Since the time factor is completely ignoredK comparison of performance between two

periods on the basis of contribution alone will gi!e the misleading results$



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(.= COST ;OLUME PROFIT ANALYSIS

?ost 2olume Profit *nalysis ? 2 P. is a systematic method of examining the relationship between

changes in the !olume of output and changes in total sales re!enue expenses costs. and net profit$ &nother words$ &t is the analysis of the relationship existing amongst costs sales re!enues output and

the resultant profit$

?2P analysis expands the use of information pro!ided by brea+-e!en analysis$ * critical part of ?2P

analysis is the point where total re!enues e%ual total costs both fixed and !ariable costs.$ *t this

brea+-e!en point a company will experience no income or loss$ This brea+-e!en point can be an

initial examination that precedes more detailed ?2P analysis$

?2P analysis employs the same basic assumption as in brea+e!en analysis$ The assumptions

underlying ?2P analysis areKThe beha!iour of both costs and re!enues is linear throughout the rele!ant range of acti!ity$ This

assumption precludes the concept of !olume discounts on either purchase materials or sales.

?osts can be classified accurately as either fixed or !ariable$

?hanges in acti!ity are the only factors that affect costs$

5hen a company sells more than one type of product the product mix the ratio of each product to

total sales. will remain constant$

The components of ?2P analysis areK

3e!els or !olume of acti!ity

)nit selling prices

2ariable cost per unit Total fixed costs

To +now the cost !olume and profit relationship a study of the following is essentialO

>. "arginal ?ost 8ormula


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?&"*s defined as 'the study of the effects on future profit changes in fixed cost$ 2ariable costs sales

price %uantity and mix$

The cost-!olume-profit ?2P. analysis helps management in finding out the relationship of costs and

re!enues to profits the aim of an understanding is to earn profits$ Profit depends upon a large number

of factors$ The most important of which are the cost manufacture and the !olume of sales effected$

#oth these factors are interdependent-!olume of sales depends upon the !olume production$ 5hich in

turn is related to costsC ?ost again is the resultant of the operation of a number of !arying factors$

Such factors affecting costs areK

>$ 2olume of production

. ?ost !olume is a powerful tool for decision ma+ing$


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or.

Sales - 2ariable ?ost X ?ontribution

?ontribution X 8ixed ?ost Profit

The abo!e e%uation brings the fact that in order to earn profit the contribution must be more than

fixed expenses$ To a!oid any loss the contribution must be e%ual to fixed cost$

(.? Cotri,"tio#

The term ?ontribution refers to the difference between Sales and "arginal ?ost of Sales$ &t also

termed as UEross "argin$U ?ontribution enables to meet fixed costs and profit$ Thus contribution will

first co!ered fixed cost and then the balance amount is added to Net profit$ ?ontribution can be

represented asO

?ontribution X Sales - "arginal ?ost

?ontribution X Sales - 2ariable ?ost

?ontribution X 8ixed 7xpenses Profit

?ontribution - 8ixed 7xpenses X Profit

Sales - 2ariable ?ost X 8ixed ?ost Profit

?XS-2$?

?X8$?P

S-2$?X8$?P

?-8$?XP

>$ Selling price containing profitO

?ontribution X 8ixed cost Profit


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?ontribution X 8ixed loss

(.@ Br%&k8E)% A&lysis#

#rea+-7!en *nalysis is also called ?ost 2olume Profit *nalysis$ The term #rea+-7!en *nalysis is

used to measure interrelationship between costs !olume and profit at !arious le!el of acti!ity$ *

concern is said to brea+-e!en when its total sales are e%ual to its total costs$ &t is a point of no profits

no loss$ This is a point where contribution is e%ual to fixed cost$ &n other words the brea+-e!en point

where income is e%ual to expenditure Zor. total sales e%ual to total cost$

The brea+-e!en point can be calculated by the following formulaO

#rea+-7!en Point in )nits

;$I *SS)"PT&4N )N,7/3@&NE #/7*6-727N-*N*3@S&S

The brea+-e!en-analysis is based on the following assumptions

>$ The cost and re!enues functions are linear functions$ This is for the

:$ The costs are made up of fixed and !ariable costs$

>>$ There is only one product or in the case of multiple products the sales mix does

not change$ &n other words when se!eral products are being sold the sale of

!arious products will always be in some predetermined proportion$

>;$ There will be no change in the general price le!el$

;$I STATEMENT OF PROFIT

Particulars amount

Sales WWW

3essO-2ariable cost WWW

?ontribution WWW

3essO- 8ixed cost WWW

Profit WWW



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Sales X Total cost Profit X 2ariable cost 8ixed cost Profit

Total ?ost X 2ariable cost 8ixed cost

2ariable cost /atio X Z2ariable cost 1 Sales[ W >::

Sales G 2ariable cost X 8ixed cost Profit

?ontribution X Sales W P12 /atio

(.14 PROFIT ;OLUME RATIO P; RATIO#8

The ratio or percentage of contribution margin to sales is +nown as P12 ratio$ This ratio is

also +nown as marginal income ratio$ ?ontribution to sales ratio$ P12 ratio usually expressed

as a percentage is the rate at which profit increases with the increase in !olume$ The formula

for P12 ratioK

>$ Z?ontribution 1 Sales[ W >::

::

;$ Z?hange in profit 1 ?hange in sales[ W >::

9$ Z?hange in contribution 1 ?hange in sales[

(.11 SINIFICANCE OF PROFIT ;OLUME 5P;6 RATIO

Profit !olume ratio is a logical extension of marginal costing$ &t is study of the

interrelationship of cost beha!iour patterns le!els of acti!ity and the profit that result from

each alternati!e combination$ The significance of profit !olume ratio may enumerate from the

following application which are as underK



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*scertainment of profit on a particular le!el of sales !olume$

,etermination of brea+ e!en profit$

?alculation of sales re%uired to earn a particular le!el of profit$

7stimation of the !olume of sales re%uired to maintain the present le!el of profit in

case selling prices are not to be reduced by as stipulated margin$

)seful in de!eloping flexible budget for costs for decisions relating to pricing$

6eeping or dropping product lines$ *ccepting or rejecting particular order$ "a+e or

buy decision sales mix planning altering plant layout channels of distribution

specification promotional acti!ities etc$$ 7!aluation of the impact of costs factors on profit$

(.12 BREA7 E;EN POINT BEP#8

>$ 8ixed cost 1 ?ontribution per unit \in units]

$ Profit planning


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I$ Problem of +ey factor

>:$ Selection of suitable product mix

(.1: MARIN OF SAFETY MOP

* principle of in!esting in which an in!estor only purchases securities when the mar+et price

is significantly below its intrinsic !alue$ &n other words when mar+et price is significantly

below your estimation of the intrinsic !alue the difference is the margin of safety$ This

difference allows an in!estment to be made with minimal downside ris+$

"argin of safety is a concept used in many areas of life not just finance$ 8or example

consider engineers building a bridge that must support >:: tons of traffic$ 5ould the bridge

be built to handle exactly >:: tons probably not$ &t would be much more prudent to build the

bridge to handle say >;: tons to ensure that the bridge wills no collapse under a hea!y load$

"4S X budgeted sales G brea+-e!en sales

"argin of safety is used in brea+-e!en analysis to indicate the amount of sales that are abo!e

the brea+-e!en point

>$ *ctual sales G #rea+ e!en sales


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4perating le!erages X contribution17#&T

?ombined le!erages X contribution17#T

Trends analysis

The income statement discloses net profit or net loss on account of operations$ * comparati!e

income statement will show the absolute figures for two or more periods$ The absolute

change from one period to another and if desired$ The change in terms of percentages$ Since

the figure for two or more periods are shown side the reader can %uic+ly ascertain whether

sales ha!e increased whether cost of sales has increased or decreased ect$$

@XaXbx.

"argin of safety is calculated as followsK

"argin of safety X total sales- brea+ e!en sales

"argin of safety can also be calculated with the help of P12 ratioK

"argin of safety X profit1 profit !olume

"argin of safety can also be expressed as percentage of salesK

"argin of safety1total salesW>::

(.1> Profit ;ol"*% R&tio PI ; R&tio6G

Profit 2olume /atio is also called as ?ontribution Sales /atio or. "arginal &ncome /atio or.

2ariable Profit /atio$ &t is used to measure the relationship of contribution the relati!e profitability of

different products$ Processes or departments$ &t also measures the rate of change of profit due to

change in !olume of sales$ &ts fundamental property is that if per unit sales price and !ariable cost areconstant then P12 ratio will be constant at all the le!els of acti!ities $ a change is fixed cost does not

affect P12 ratio$

(.1@ Us%s of +osts8)ol"*%8$rofit &&lysis

a. ?2P analysis helps in forecasting costs and profits as a result of change in !olume$

b. &t helps fixing a sales !olume le!el to earn or co!er gi!en re!enue return on capital

employed or rate of di!idend$

c. &t assist determination of effect of change in !olume due to plant expansion or

acceptance of an order with or without increase in costs or in order or in other wordsa %uantum of profit to be obtained with changes in !olume of sales$



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d. Through cost !olume-profit analysis inter-firm comparison of profitability can be

done intelligently$

e. ?$2$P analysis helps in determination relati!e profitability of each product line

project or profit plan$

f. &t helps in determining cash re%uirement at a desired !olume of output with the help

of cash brea+ e!en charts$

g. #rea+ e!en analysis emphasi0es the importance of capacity utili0ation for achie!ing

economy$

h. 8rom brea+ e!en analysis during ser!e recession the comparati!e effects of a shut

down or continued operation at a loss is indicated$

i. The effect on total cost of a change in the fixed o!er-head is more clearly

demonstrated through brea+-e!en analysis and cost-!olume profit charts$j. The condition of a business such as profit potentials re%uirements of capital financial

stability and incidence of fixed and !ariable costs can be gauged from a study of the

position of the brea+-e!en point and angle of incidence in the brea+-e!en chart$

(.1@ *&ri of %"&tio

Sales cost X profit

4r sales-fixed cost !ariable cost. Xprofit

4r sales-!ariable cost X fixed cost profit

S-2 X8-P

5here

SXsales

2X!ariable

8Xfixed cost

PXprofit

"ethods for determining brea+ e!en points

The sales !olume which e%uation total re!enue with related costs and results in profit

or loss is called brea+-e!en point #7P. brea+-e!en point can be determined by the following

methodsK

>$ *lgebraic method

a$ ?ontribution margin approach

b$ 7%uation techni%ue


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>$ *lgebraic method

a$ ?ontribution margin approach

#rea+-e!en point in units. X total fixed costs1selling price per unit-

!ariable cost per unit

4r X total fixed costs1contribution per unit

#rea+-e!en point in /s. X fixed cost1 profit !olume ratio

4rX brea+-e!en points units.Wselling price per unit

Shalini Project Marginal Costing

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