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Marginal Cost (MC)<br />The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. More formally, the marginal cost is the derivative of total production costs with respect to the level of output<br />Marginal Cost financial definition of Marginal Cost. Marginal Cost ...<br />The increase or decrease in a firm's total cost of production as a result of changing production by one unit. marginal cost. The additional cost needed to<br />Marginal cost and average cost can differ greatly. For example, suppose it costs $1000 to produce 100 units and $1020 to produce 101 units. The average cost per unit is $10, but the marginal cost of the 101st unit is $20<br />Elements of cost<br />1. Material(Material is a very important part of business) <br />A. Direct material <br />B. Indirect material <br />2. Labour <br />A. Direct labor <br />B. Indirect labor <br />3. Overhead <br />A. Indirect material <br />B. Indirect labor <br />They are grouped further based on their functions as,<br />1. Production or works overheads <br />2. Administration overheads <br />3. Selling overheads <br />4. Distribution overheads <br /> Classification of costs<br />Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are:<br />By nature or element: materials, labor, expenses <br />By functions: production, selling, distribution, administration, R&D, development, <br />As direct and indirect <br />By variability: fixed, variable, semi-variable <br />By controllability: controllable, uncontrollable <br />By normality: normal, abnormal <br />What is Marginal Costing?It is a costing technique where only variable cost or direct cost will be charged to the cost unit produced.Marginal costing also shows the effect on profit of changes in volume/type of output by differentiating between fixed and variable costs.Salient Points:Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing; In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred; Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs. The marginal cost statement is the basic document/format to capture the marginal costs. <br />Features of Marginal Costing System:It is a method of recording costs and reporting profits; All operating costs are differentiated into fixed and variable costs; Variable cost â€“charged to product and treated as a product cost whilst Fixed cost treated as period cost and written off to the profit and loss account <br />Advantages of Marginal Costing:It is simple to understand re: variable versus fixed cost concept; A useful short term survival costing technique particularly in very competitive environment or recessions where orders are accepted as long as it covers the marginal cost of the business and the excess over the marginal cost contributes toward fixed costs so that losses are kept to a minimum; Its shows the relationship between cost, price and volume; Under or over absorption do not arise in marginal costing; Stock valuations are not distorted with present years fixed costs; Its provide better information hence is a useful managerial decision making tool; It concentrates on the controllable aspects of business by separating fixed and variable costs The effect of production and sales policies is more clearly seen and understood. <br />Disadvantages Of Marginal CostingMarginal cost has its limitation since it makes use of historical data while decisions by management relates to future events; It ignores fixed costs to products as if they are not important to production; Stock valuation under this type of costing is not accepted by the Inland Revenue as itâ€™s ignore the fixed cost element; It fails to recognize that in the long run, fixed costs may become variable; Its oversimplified costs into fixed and variable as if it is so simply to demarcate them; Itâ€™s not a good costing technique in the long run for pricing decision as it ignores fixed cost. In the long run, management must consider the total costs not only the variable portion; Difficulty to classify properly variable and fixed cost perfectly, hence stock valuation can be distorted if fixed cost is classify as variable.<br />Basic Equation: <br />Variable Cost = Direct Materials + Direct Labor + Direct Expenses <br />Variable cost per unit = Difference in cost / Difference in Activity level <br />Variable Cost is also called as Marginal Cost. <br /> <br />Marginal Cost Equation: <br />Sales (S) = Variable Cost (V) + Fixed Expenses (F) + or – Profit (P) / Loss (L) <br />S = Sales <br />V = Variable Cost <br />F = Fixed Expenses <br />+P = Profit <br />-P = Loss <br />Sales - Variable Cost = Fixed Expenses + or – Profit / Loss<br />S - V = F + or – P <br /> <br />Contribution: <br />Sales – Variable Cost = Contribution = S - V<br />Fixed Expenses + or – Profit / Loss = Contribution = F + or – P <br />In simple form, S – V = F + or – P <br /> <br />Missing Factor: <br />In the above four factors, if any three factors are known, the remaining one can be easily found out. <br />Sales = Variable Cost + Fixed Expenses + Profit<br />Variable Cost = Sales – (Fixed Expenses + Profit)<br />Fixed Expenses = Sales – Variable Cost – Profit<br />Profit = Sales – Variable Cost – Fixed Expenses <br /> <br />Units sold: <br />Units sold = Contribution margin / Contribution margin per unit<br /> <br />Break Even Point: <br />A business is said to break even when its total sales are equal to its total costs.<br />It is a point where<br />There is no profit or no loss.<br />Contribution is equal to Fixed Expenses.<br />Break Even Point (in Units) = Total Fixed Expenses / (Selling Price per Unit – Marginal Cost per Unit) <br />The answer will be in units and not in value because break even point is based on unit cost. <br /> <br />Break Even Sales: <br /> S – V = F + P <br />At Break Even Point Profit equals zero. <br />Hence, S – V = F <br />For Break Even Point, the equation is S – V = F <br />Dividing both sides by S – V, <br /> ( S – V) / (S – V) = F / (S – V) <br /> i.e. 1 = F / (S – V) <br />Multiplying both sides by S, <br /> S * 1 = ( F * S) / (S – V) <br />Therefore, the formula for the calculation of break even sales is: <br /> ( F * S) / (S – V) <br />Marginal Costing & Profit Planning - Presentation Transcript<br />MARGINAL COSTING & PROFIT PLANNING AFTERSCHO ☺ OL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’ Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL www.afterschoool.tk AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS <br />MARGINAL COSTING & PROFIT PLANNING Dr. T.K. Jain. AFTERSCHO ☺ OL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] www.afterschool.tk , www.afterschoool.tk www.afterschoool.tk AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS <br />Jitu Ltd. produces one standard type of article. The result of the last 4 months as follows: Output (Units) 1 200 2 300 3 400 4 600 Prime cost is Rs. 10 per unit. Variable expenses are Rs. 2 per unit. Fixed expenses as 36000 per annum. Find out cost per unit of each month. <br />Fixed cost per month : 3000. formula: fixed cost per unit + variable cost per unit. the cost per unit : 1: (3000/200) +10+2 = 27; 2: (3000/300) + 10+2 = 22 per unit, so on…. <br />Sales of a product amount to 200 units per month at Rs. 10 per unit. Fixed overhead is Rs. 400 per month and variable cost Ps. 6 per unit. There is a proposal to reduce price by 10%. Calculate the present and future P/V ratios and find by applying P/V ratios, how many units must be sold to maintain total profit. <br />PV ratio = contribution / price * 100 <br />Contribution = 10 – 6 = 4 per unit PV R=40% <br />Total profit = 400. In order to maintain profit, <br />New contribution = 9 – 6 = 3 per unit. Profit=contribution – fixed cost. <br />sales required : 3X – 400 = 400 or X = 267 <br />New PV ratio = 3/9 * 100 = 33.33% <br />Based on the following information calculate the break-even point and the turnover required to earn a profit of Rs. 36,000. Fixed overheads Rs. 1,80,000 Variable cost per unit 2 Selling price per unit 20 If the company is earning a profit of Rs. 36,000, express the ‘margin of safety’ available to it ? <br />Sales volume at target profit = (Fixed cost + target profit) / contribution per unit <br />= (180000+36000) / (20 – 2) = 12000 units or Rs. 240000 (in amount) <br />BEP = (180000/(20-2)) = `10000 units or Rs. 200000 <br />Margin of safety= sales – BEP level or (Sales – BEP) / Sales *100 <br />Thus margin of safety = 40000 or 16.7% answer. <br />ASU furnishes you the following information: Year 1996 First half Second half Sales Rs. 8,10,000 Rs. 10,26,000 Profit earned Rs. 21,600 64,800 Prom the above you are required to compute PV ratio assuming that the fixed cost remains the same in both the periods <br />PV Ratio = change in profit / change in sales * 100 <br />= (64800- 21,600 )/ (10,26,000-8,10,000) * 100 = 20% answer <br />At the budgeted activity of 75% of total capacity, a company earns a P/V ratio of 25% a profit of 10% on sales. During the course of the year the company had to reduce its price of the product by 10% due to recession. The company was able to only 50% of its capacity- The sales value at this level was Rs. 13,50,000 at the reduced price of Rs. 9 per unit. Due to reduction in production the actual variable costs went up by 2% of the budget. What is BEP at original and reduced price ? <br />Solution… <br />Sales at 50% = 1350000 <br />Sales at 100% = 2700000 <br />Sales at 100% at original price = 2700000*100/90 = 3000000 <br />Budget level: 2250000 <br />Contribution = 562500 <br />Profit = 225000 <br />Fixed cost = (562500- 225000) =337500 <br />BEP level at original = 337500/.25 =Rs1350000 <br />BEP level at reduced price level =337500/.1666 <br />= Rs. 2025810 answer. <br />What is fixed cost… <br />The cost that you have to incur whatever may be the business volume. Even if the production goes up or falls down – the fixed costs remain the same. Thus this is the cost which will always remain at the same level – irrespective of sales volume or production. <br />What is variable cost? <br />This is cost which varies with production. If production goes up, this cost will also go up. The per unit cost will remain stable. For Example, if per unit variable cost is 20, it will remain 20 even if you double the production. (there are semivariable expenses also – which do donot vary in the same proportion). <br />What is contribution…. <br />Sales – Variable cost is called contribution. <br />How do you calculate BEP? <br />There are two ways – <br />BEP in volume (in units) <br />BEP in money terms (in Rupees) <br />BEP in Units… <br />The formula : <br />= Fixed Cost / (Contribution per unit) <br />BEP in Amount (in Rupees) <br />= Fixed Cost / P.V. Ratio <br />P.V. Ratio : <br />= Contribution / Sales * 100 <br />Example…. <br />If the fixed cost is Rs. 10000 and selling price per unit is Rs. 10, and variable cost per unit is Rs. 6, what is the BEP in units? <br />Solution: <br />Fixed cost / contribution per unit <br />= 10000/(10 – 6) <br />= 2500 units. <br />Example… <br />If the fixed cost is Rs. 10000 and selling price per unit is Rs. 10, and variable cost per unit is Rs. 6, what is the BEP in Amount (Rupees)? <br />Solution: <br />Fixed cost / PV Ratio <br />PV Ratio = 4 / 10 * 100= 40% <br />BEP = 10000 / 40% <br />= 25000 Rupees amount. <br />Calculate BEP from the following… <br />Selling price Rs. 20 per unit <br />Variable manufacturing costs=11 per unit <br />Variable selling costs=3 per unit <br />Fixed factory overheads=5,40,000 per yr <br />Fixed selling costs 2,52,000 per year <br />Solution… <br />BEP = Fixed Cost / Contribution per unit <br />=7,92,000 / 6 <br />= 132,000 units <br />A company has fixed expenses of Rs. 90,000 with sales at Rs. 3,00,000 and a profit of Rs 60000 Calculate the profit/volume ratio <br />Contribution = sales – Variable cost <br />Total cost = 3 lakh- 60000 = 2.4 lakhs <br />Variable cost = 2,40,000-90000 = 150000 <br />P.V. Ratio= C/ S * 100 <br />(150000/300000) * 100 = 50% answer. <br />Xyz makes 10,000 units of a product at a cost of Rs. 4 per unit and there is home market for consuming the entire volume of production at the sale price of As. 4.25 per unit. In the year 2008, there is a fall in the demand for home market which can consume 10,000 units only at a sale price of As. 3.72 per unit. The analysis of the cost per 10,000 units is: Materials rs. 15,000 Wages 11,000 Fixed overheads 8,000 Variable overheads 6,000 The foreign market is explored and it is found that this market can consume 20,000 units of the product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional 10,000 units of the product (over initial 10,000 units) that fixed overheads will increase by 10 per cent. <br />Bardia’s Solution… <br />Total fixed cost now = 8800 <br />Selling price = 3.55 and 3.72 <br />Variable cost = 3.2 per unit <br />Total variable cost = 30000 * 3.2= 96000 <br />Total Fixed cost = 8800 <br />Total Cost = 104800 <br />Sales = 3.72*10000 + 3.55*20000 = 108200 <br />Thus there will be profit of 3400. Ans.<br />Break-even<br />From Wikipedia, the free encyclopedia<br />Jump to: navigation, search<br />For the 2008 single by The Script, see Breakeven (song).<br />The Break-Even Point is where Total Costs equal Sales. In the Cost-Volume-Profit Analysis model, Total Costs are linear in volume.<br />In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "
. A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return.<br />For example, if a business sells less than 200 tables each month, it will make a loss, if it sells more, it will be a profit. With this information, the business managers will then need to see if they expect to be able to make and sell 200 tables per month.<br />If they think they cannot sell that much, to ensure viability they could:<br />Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control of telephone bills or other costs) <br />Try to reduce variable costs (the price it pays for the tables by finding a new supplier) <br />Increase the selling price of their tables. <br />Any of these would reduce the break even point. In other words, the business would not need to make so many tables to make sure it could pay its fixed costs.<br />Contents[hide]1 Computation 2 Application 3 Other uses of the term 4 See also 5 References 6 External links 7 Further reading <br /> Computation<br />In the linear Cost-Volume-Profit Analysis model, the break-even point (in terms of Unit Sales (X)) can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as:<br />where:<br />TFC is Total Fixed Costs, <br />P is Unit Sale Price, and <br />V is Unit Variable Cost. <br />The Break-Even Point can alternatively be computed as the point where Contribution equals Fixed Costs.<br />The quantity is of interest in its own right, and is called the Unit Contribution Margin (C): it is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs. Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost:<br />In currency units (sales proceeds) to reach break-even, one can use the above calculation and multiply by Price, or equivalently use the Contribution Margin Ratio (Unit Contribution Margin over Price) to compute it as: <br />R=C Where R is revenue generated C is cost incurred i.e. Fixed costs + Variable Costs or Q X P(Price per unit)=FC + Q X VC(Price per unit) Q X P - Q X VC=FC Q (P-VC)=FC or Q=FC/P-VC=Break Even Point<br /> Application<br />The break-even point is one of the simplest yet least used analytical tools in management. It helps to provide a dynamic view of the relationships between sales, costs and profits. A better understanding of break-even, for example, is expressing break-even sales as a percentage of actual sales—can give managers a chance to understand when to expect to break even (by linking the percent to when in the week/month this percent of sales might occur).<br />The break-even point is a special case of Target Income Sales, where Target Income is 0 (breaking even).<br />There is a myth that Black Friday is the annual break-even point in American retail sales, but in fact retailers generally break-even, and indeed profit, nearly every quarter<br />