Marginal costing

meaning and problem solving

1. MARGINAL COSTING G.V.V.V.PRASAD BABU M.Com.,DBF (CFA) Lecturer in Commerce GOVERNMENT DEGREE COLLEGE NARSIPATNAM

2. WHAT IS PRICE? HOW DO WE FIX THE PRICE FOR A PRODUCT? COST +PROFIT =SELLING PRICE

3. COST + PROFIT = SP VARIABLE COST FIXED COST

4. BEHAVIOUR VARIABLE COST CHANGES WITH THE UNITS PRODUCED EX: RAW MATERIAL, LABOUR FIXED COST DOES NOT CHANGE WITH THE UNITS PRODUCED EX: RENT

5. VARIABLE COST = MARGINAL COST VARIABLE COST IS ALSO CALLED AS MARGINAL COST… BCZ MARGINAL COST MEANS THE COST ADDED BY PRODUCING ONE ADDITIONAL UNIT OF A PRODUCT

6. VARIABLE COST PRIME COST

7. DIFFERENCE BETWEEN ABSORPTION COSTING SALES = xxxxx (-) V.C =xxx F.C =xxx xxxx ------------------- PROFIT = xxxx MARGINAL COSTING SALES = XXXX (-) V.C = XXXX -------- CONTRIBUTION = XXXX (-) F.C = XXX --------- PROFIT = XXX

8. Work it out… Units sold= 1000 Variable cost per unit=6 Fixed Cost = 1000 Selling Price = 10

9. CONTRIBUTION Difference between Sales and Variable Cost CONTRIBUTION=SALES-VARIABLE COST C = S – VC “FUND” or “POOL” which covers Fixed costs

10. P/V RATIO IF THE CONTRIBUTION IS EXPRESSED AS A PERCENTAGE ON SALES P/V RATIO = CONTRIBUTION ---------------------- X 100 SALES (or) C/Sx100

11. SUM UNITS SOLD=1000 SP=100 VC=60 Per Unit Fixed Cost= 20000

12. BREAK-EVEN ANALYSIS It refers to a system of determining that level of operations where the total revenues equal total expenses .. Sales = Variable cost +Fixed Cost + Profit Sales = Variable cost +Fixed Cost That is “No Profit No Loss” situation

13. B.E.P EQUATION B.E.P(Units) = Fixed Cost Contribution per Unit B.E.P (Sales) = Fixed Cost P/V Ratio

14. MARGIN OF SAFETY DIFFERENCE BETWEEN ACTUAL SALES AND BREAK-EVEN SALES MOS = ACTUAL SALES – B.E.P SALES (OR) PROFIT P/V RATIO

15. ANGLE OF INCIDENCE THIS IS THE ANGLE AT WHICH THE SALES LINE CUTS THE TOTAL COST LINE. A LARGE ANGLE OF INCIDENCE SHOWS A HIGH RATE OF PROFIT.

16. BREAK-EVEN CHART

17. ASSUMPTIONS FIXED COST REMAINS CONSTANT VC VARY PROPORTIONALLY WITH VOLUME SELLING PRICE DOES NOT CHANGE AS VOLUME CHANGES

18. IMPORTANCE VERY USEFUL IN MANAGEMENT’S DECISION MAKING PROCESS- MAKE OR BUY, EFFECTS OF CHANGES IN SP AND VC