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# Ppt marginal-costing

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## Ppt marginal-costingPresentation Transcript

• marginal costing
• Why do we study Marginal Costing?
• What do we study in Marginal Costing? Marginal Cost Marginal Costing Direct Costing Absorption Costing Contribution Profit Volume Analysis Limiting Factor/key factor Break Even Analysis Profit Volume Chart
• What do we study in Marginal Costing?andWhy do we Study MC?Marginal CostMarginal CostingDirect CostingAbsorption Costing ManagementContribution DecisionProfit Volume Analysis MakingLimiting Factor/key factorBreak Even AnalysisProfit Volume Chart
• Marginal Cost“Marginal cost is amount at any given volume of out put by which aggregate costs are changed…..if volume of outputis increased or decreased by one unit”
• Marginal Cost “Marginal cost is amount at any given 1 volume of out put by which aggregate costs are changed if volume of outputinal Costincreased 15000 is 100 x150= or decreased by one unit”Cost = 5000 total 20000 2 1 Manufacture 100 radio Variable costs Rs150 p u Fixed cost Rs 5000 Marginal cost 150 x101=15150 2 If Manufacture 101 radios Fixed Cost = 5000 TOTAL 20150 additional Cost=Rs 150
• Marginal Costing“marginal costing is ascertainment ofmarginal cost by differentiating betweenfixed and variable costsand of the effectof changes in volume or type of output”
• Marginal CostingWhat Could be effects ofChangesIn volumeorType of output
• Marginal CostingWhat Could be effects ofChanges 1 lakh unitsIn volume To 2 lakh unitsorType of output
• Marginal Costing From OneWhat Could be effects of Model of Car toChanges AnotherIn volumeor From OneType of output Size of product to another
• Marginal Costing ---CharacteristicsFixed & Variable Inventory Costs Valuation Marginal Costing MC Costs as Contribution &Products Costs ProfitFixed Costs as Pricing Period Costs
• Marginal Costing ---Characteristics Segregation Semi-variable costs Semi-variable costsFixed & Variable are segregated are segregated Costs into fixed & into fixed & variable variable
• Marginal Costing ---CharacteristicsMarginal Costs Only Variable costs Only Variable costs as are charged are chargedProducts Costs to products to products
• Marginal Costing ---Characteristics Fixed costs treated Fixed costs treatedFixed Costs as Period costs Period costs Period Costs Charged to costing Charged to costing P & L Account P & L Account
• Marginal Costing ---Characteristics WIP & F goods are WIP & F goods areInventory Valued at Valued atValuation Marginal Cost Marginal Cost
• Marginal Costing ---Characteristics S-V=C S-V=CContribution Profitability judged on Profitability judged on Contribution made Contribution made
• Marginal Costing ---Characteristics Pricing is based on Pricing is based onPricing Contribution & Contribution & Marginal Costs Marginal Costs
• Marginal Costing ---Characteristics A B C Total Sales - - - ----Less VC - - - ---- Marginal CostingContribution - - - ---- & ProfitFixed Cost ----Profit -----
• Marginal Costing --- Marginal Costing Profit Sales of A Sales of B Sales of C less less less Marginal cost Marginal cost Marginal cost Of A Of B Of C = = =Contribution of Contribution of Contribution of A B C Total Contribution of A,B& C less Total Fixed = Profit/loss Cost
• Absorption Costing“Absorption cost is a total cost techniqueUnder which total cost ie fixed & variableis charged to production.Inventory is also valued at total cost.
• Absorption-Marginal Costing--differences Measurement Valuation Of Fixed & Profitability Variable Of stock Costs
• Absorption-Marginal Costing--differences Marginal Costing Absorption Costing Fixed & Only variable cost Both F & V Costs Variable Are charged Costs FC charged to P/L
• Absorption-Marginal Costing--differencesValuationOf stock WIP & FS at Marginal Total Cost Cost
• Absorption-Marginal Costing--differences Measurement Of ProfitabilityC=S-V P=S-V-F
• Comparative Cost Statement Marginal Costing Absorption Costing Months Months 1 2 3 Total 1 2 3 Total Rs Rs Rs Rs Rs Rs Rs Rs(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,0006,00,000Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000 F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625 (B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _ ( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _Profit (C-D) 45,000 31,000 59,000 1,35,000 (A-B) 45,000 37,125 52,875 1,35000
• Comparative Cost Statement Marginal Costing Absorption Costing Months Months 1 2 3 Total 1 2 3 Total Rs Rs Rs Rs Rs Rs Rs Rs(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,0006,00,000Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000 F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625 (B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _ ( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _Profit (C-D) 45,000 31,000 59,000 1,35,000 (A-B) 45,000 37,125 52,875 1,35000
• Comparative Cost Statement Marginal Costing Absorption Costing Months Months 1 2 3 Total 1 2 3 Total Rs Rs Rs Rs Rs Rs Rs Rs(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,0006,00,000Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000 F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625 (B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _ ( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _Profit (C-D) 45,000 31,000 59,000 1,35,000 (A-B) 45,000 37,125 52,875 1,35000
• Concept Of Contribution
• Contribution is the difference betweensalesAnd the marginal (Variable) cost Contribution =sales-variable cost C= S-V Contribution = Fixed Cost+ Profit C= F+P Therefore S-V = F+P
• Contribution is the difference betweensalesAnd the marginal (Variable) cost S-V=F+P If any 3 factors in the equation are known The 4th could be found out P=S-V-F P=C-F F=C-P S=F+P+V V=S-C……….
• PROFIT ? SALES? C=S-VSales =Rs 12,000 =12,000-7000=5000 S=C+VV Cost=RS 7,000 P=C-F =5,000+7,000F Cost=Rs 4,000 =5,000-4000 =Rs 12,000 =Rs 1,000
• F COST? V Cost?Sales =Rs 12,000 F=C-P V=S-CV Cost=RS 7,000 =5,000-1,000 =12,000-5000F Cost=Rs 4,000 =Rs 7,000 =Rs 4,000
• Profit –Volume Ratio (PV Ratio) (Expresses the relation of Contribution to sales) Sales= Rs 10,000 V Cost=Rs 8,000P/V Ratio =Contribution = C/S =S-V/S Sales C = S XP/V Ratio P/V Ratio=c/s C =S-V/S S = -------- =10,000-8000/10,000 P/V Ratio =20%
• Profit –Volume Ratio (PV Ratio) When PV Ratio is GivenC= SXPV RatioC= 10000X20% =Rs 20,000
• Profit –Volume Ratio (PV Ratio) Change in ContributionP/V Ratio = --------------------------------- Another Method Change in Sales Change in profit = ----------------------- Change in Sales Year sales net profit 2005 20,000 1000 1600-1000 =-------------------x 100 2006 22,000 1600 22000-20000 600 = -----------x100=30% 2,0000
• What Could be the Uses of PV Ratio? Break Even Point Profit at Given Sales Vol required to earn given Profit
• How Improvement in PV Ratio Could be Achieved? Increasing Selling Price Reducing Variable Cost Changing Sales Mix
• Limiting Or Key Factora factor in short supply
• Limiting Or Key Factora factor in the activities of an undertakingwhich at a point of time or over a period will limit the volume of out put
• Limiting Or Key FactorWhat Could be the Limiting Factors ? Labour Materials Power Sales Capacity Machines ………….
• Cost- Volume- Profit Analysis
• Cost- Volume- ProfitAnalysis Cost Of Production Selling Prices Volume Produced /Sold
• Cost- Volume- ProfitAnalysis Break Even Analysis Profit Volume Chart
• Cost- Volume- ProfitAnalysis Break Even AnalysisA point of no profit no lossA point where revenue equals cost
• What are BEP---assumptionsAll costs are fixed or variableVC remains ConstantTotal FC remains ConstantSelling Price don’t change With VolumeSynchronisation of Prod & Sales No Change in Productivity per workers
• Cost- Volume- ProfitAnalysis Break Even Analysis Methods Algebraic Method Graphic Method
• Cost- Volume- Profit Analysis ALGEBRAIC Fixed Cost METHODBEP (Units) = --------------- = F Contribution PU S-V Fixed CostBEP (Rs ) = ----------------- x Sales Contribution Fixed CostBEP (Rs) = ------------------ P/V Ratio
• Cost- Volume- Profit Analysis ALGEBRAIC Fixed Cost METHODBEP (Units) = --------------- = F Contribution PU S-V Fixed CostBEP (Rs ) = ----------------- x Sales Contribution F Cost=Rs 12000 Fixed Cost S Price=Rs12 puBEP (Rs) = ------------------ V Cost =Rs 9 pu P/V Ratio Find BEP
• Cost- Volume- Profit Analysis F Cost=Rs 12000Other Uses S Price=Rs12 pu V Cost =Rs 9 pu Profit when sales areProfit at diff. Sales Vol. a) Rs 60,000 b) Rs 1,00,000Sales at Desired Profit
• Cost- Volume- Profit Analysis F Cost=Rs 12000 S Price=Rs12 puProfit at diff. Sales Vol. V Cost =Rs 9 pu Profit when sales are CP/V Ratio= ----- = 3/12=25% a) Rs 60,000 S b) Rs 1,00,000WHEN SALES=Rs 60,000contribution=salesxp/vratio =60000x25% =Rs 15000Profit =contribution-fixed cost =15000-12000 =Rs3000
• Cost- Volume- Profit AnalysisOther Uses F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 puSales at Desired Profit Sales if desired profit a) Rs 6000 b) Rs 15,000 F Cost +Desired ProfitSales= ------------------------------- P/V Ratio
• Cost- Volume- Profit AnalysisSales at Desired Profit F Cost=Rs 12000 S Price=Rs12 pu V Cost =Rs 9 pu F Cost +Desired ProfitSales= ------------------------------- Sales if desired profit P/V Ratio a) Rs 6000 b) Rs 15,000 12,000+6000a)Sales= --------------- 25% =Rs 72,000
• CVP Analysis -questionP ltd has earned a profit of Rs 1.80 lakh on sales ofRs 30 lakhs and V Cost of Rs 21 lakhs.work outa)BEPb)BEP When V Cost decreases by5%c)BEP at present level when selling price reduced by5%
• CVP Analysis - S-VP/V Ratio=-------- S 3000000-2100000 = ------------------------ 3000000 =30%Sales =VC+FC+P3000000=2100000+FC+180000 FC =Rs 720000 7,20,000 BEP= ------------- 30% =Rs 2400000
• CVP Analysis -questionb) When V Cost increases by 5%New Variable Cost=2100000+5% =22,05,000PV Ratio 3000000-2205000 3000000 =26.5%BEP =7,20,000/ 26.5% =Rs 27,16,981
• CVP Analysis -questionc)When Selling Price reduced by 5%New SP=3000000—5% =Rs 28,50,000Contribution=28,50,000-21,00,000 =Rs7,50,000PV Ratio =7500000/2850000 =26.32% FC+PROFITDesired Sales= ------------------ =720000+1800000 PV Ratio 26.32% =Rs 34,19,453( appx)
• BEPGraphical Presentation
• Break-Even AnalysisCosts/Revenue Initially a firm will incur fixed costs, these do not depend on output or sales. FC Q1 Output/Sales
• Break-Even Analysis The Break-even is Total revenue point occursoutputais the As lower The where by Initially total firm The total costs the determined theCosts/Revenu generated, thereforethe fixed price,equalsless TR TR TC will incur and revenuecharged total price will incur firm thesee (assumingfirm,do costs, costs quantitytotal– the – the costs in steep the sold VC variable would this not depend on – examplewill be again this directly accurate curve. revenue sales. these vary output or have to sell Q1 to determinedis the with the by forecasts!)amount generate sufficient expected forecast sum of FC+VCits produced revenue to cover sales initially. costs. FC Q1 Output/Sales
• Break-Even AnalysisCosts/Revenue If the firm chose TR TR TC to set price higher VC than Rs2 (say Rs3) the TR curve would be steeper – they would not have to sell as many units to break even FC Q2 Q1 Output/Sales
• Break-Even Analysis TR)Costs/Revenue If the firm chose TR TC to set prices lower VC it would need to sell more units before covering its costs FC Q1 Q3 Output/Sales
• Break-Even Analysis TRCosts/Revenue TC Profit VCLoss FC Q1 Output/Sales
• Break-Even Analysis Margin of TR TR TC safety showsCosts/Revenue A higher how far sales can VC price would fall before losses Assume = made. If Q1 lower the current sales 1000 and Q2 = break even 1800, sales could at Q2 point and the fall by 800 units margin of before a loss would be made safety would widen Margin of Safety FC Q3 Q1 Q2 Output/Sales
• High initial FC. Interest on debt rises each year –Costs/Revenue FC rise therefore FC 1 FC Losses get bigger! TR VC Output/Sales
• Break-Even Analysis• Remember:• A higher price or lower price does not mean that break even will never be reached!• The BE point depends on the sales needed to generate revenue to cover costs
• Break-Even Analysis• Importance of Price Elasticity of Demand:• Higher prices might mean fewer sales to break- even• Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even
• Break-Even Analysis • Links of BE to pricing strategies and elasticity• Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even
• Break-Even Analysis • Links of BE to pricing strategies and elasticity• Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even
• Break-Even Analysis • Links of BE to pricing strategies and elasticity• Elasticity – what is likely to happen to sales when prices are increased or decreased?
• Marginal CostingCost Volume Chart
• Construction Of PV Chart1 select a scale on Horizontal axis---sales2 Select a scale on Vertical axis- FC & Profit3 Plot FC & Profit4 Diagonal line crosses sales line at BEP
• PV Chart Information Fixed Cost =Rs 5000 Sales =Rs 20000(pu RS 20) V Cost= Rs 10000(pu Rs10) Find PV Ratio, BEP, Profit?
• Construction Of PV Chart 8000 6000 BEP 5000 4000 2000Fixed Cost Rs Profit 0 5000 10000 15000 20000 Rs Sales Rs 2000 4000 5000 6000 8000
• Construction Of PV Chart 8000 6000 BEP 5000 4000 2000 ProfitFixed Cost Area Profit Rs 0 5000 10000 15000 20000 Rs Sales Rs Loss 2000 Area 4000 Margin of Safety 5000 6000 -------------------------- 8000
• Effect Of Change in Profit- 20% decrease in fixed CostNew F Cost= 5000- 20%=Rs4000 Fixed CostNew BEP = PV Ratio = 4000/50% =Rs 8000New Profit=S-F-V =20000-4000-10000 =Rs 6000
• Effect of Change in profit- 20% decrease in FC 8000 6000 BEP 5000 4000 2000 ProfitFixed Cost Area Profit Rs 0 5000 10000 15000 20000 Rs Sales Rs Loss 2000 Area 4000 5000 6000 8000
• Effect Of Change in Profit- 10% decrease in V CostNew V Cost= 10000- 10%=Rs9000New PV Ratio=20000-9000 =55% 20000 Fixed CostNew BEP = PV Ratio = 5000/55% =Rs 9090 AppxNew Profit=S-F-V =20000-5000-9000 =Rs 6000
• Construction Of PV Chart 8000 6000 New BEP 5000 4000 2000 ProfitFixed Cost Area Profit Rs 0 5000 10000 15000 20000 Rs Sales Rs Loss 2000 Area 4000 5000 6000 8000
• Effect Of 5% Decrease in Selling Price 8000 6000 5000 4000 2000 ProfitFixed Cost Area Profit Rs 0 5000 10000 15000 20000 Rs Sales Rs Loss 2000 Area 4000 5000 6000 EP New B 8000