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Marginal Costing

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  • that included the variable cost only

Marginal Costing Marginal Costing Presentation Transcript

  • MARGINAL COSTING
    Presented by :
    SandeshKothavale - BT0942
    SaranbirUppal - BT0943
    Shaniraj Babar - BT0944
    Sheetal Mehta - BT0945
    SheetalNarkar - BT0946
  • WHAT IS MARGINAL COST
    Marginal cost :
    Cost of the marginal or last unit produced, also defined as the cost of one more or one less unit produced besides existing level of production
    Example: if a firm produces ‘X’ unit at a cost of $ 300
    ‘X+1’ units at a cost of $ 320,
    Then the cost of an additional unit will be $ 20 which is ‘marginal cost’
  • WHAT IS MARGINAL COST
    Mathematically expressed as :
    Where:
    TC : total cost
    Q : quantity produced
  • WHAT IS MARGINAL COST
    Marginal costing :
    Defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making
    Technique of the analysis of cost information for the guidance of management which tries to find out an effect on profit due to changes in the volume of output
  • ABSORPTION COSTING
    Absorption costing
    It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs
  • ABSORPTION COSTING MARGINAL COSTING
  • ABSORPTION COSTING MARGINAL COSTING
  • PRINCIPLE OF MARGINAL COSTING
    By selling an extra item of product or service the following will happen :
    Revenue will increase by the sales value of the item sold
    Costs will increase by the variable cost per unit
    Profit will increase by the amount of contribution earned from the extra item
  • If the volume of sales falls by one item, the profit will fall by the amount of contribution earned from the item
    Profit measurement should therefore be based on an analysis of total contribution
    When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs
  • FEATURES
    Cost Classification :
    Stock/Inventory Valuation :
    Marginal Contribution :
  • APPLICATION OF MARGINAL COSTING IN BUSINESS
  • Contribution
    • Contribution is the profit before recovery of the fixed cost
    • Contribution = Sales - Variable Cost (S – V)
    • Contribution = Fixed Cost + Profit (F + P)
    • Contribution = Fixed Cost - Loss (F – L)
    • [S – V = F + P] or [S – V = F – L]
  • Contribution margin
    Contribution Margin = Marginal Profit per unit sale
    Can be used as a measure of operating leverage
  • Contribution/Sales Ratio or Profit/Volume Ratio
    Contribution = C = S – V
    Sales S S
    P/V Ratio in % = C x 100
    S
    P/V ratio = Change in Contribution Change in Sales
    = Change in Profit
    Change in Sales
  • Break even point (BEP)
    BEP (in units) = Total Fixed Cost = F
    Contribution per unit C
    BEP (in Rs.) = F = F x S
    P/V Ratio C
    P/V Ratio = F
    BEP
  • Calculation of Sales to breakeven or earn a given Profit
    Calculation of Sales = F + Profit
    to earn a given Profit C (per unit)
    (in units)
    Calculation of Sales = F + Profit
    to earn a given Profit P/V Ratio
    (in Rs.)
  • Sales at which two companies earn the same amount of Profit
    Sales at which two
    companies earn the = Difference in Fixed Cost same amount of Profit Difference in P/V Ratio
  • Margin of Safety
    Margin of Safety = Actual Sales – Breakeven Point
    (M/S)
    M/S Ratio = Actual Sales – BEP
    Actual Sales
    M/S = Profit
    P/V Ratio
  • Margin of Safety
    Profit = Margin of Safety x P/V Ratio
    Profit = Actual Sales x M/S Ratio x P/V Ratio
  • ADVANTAGE
    Marginal costing is simple to understand
    It helps in short-term profit planning by breakeven and profitability analysis
    Practical cost control is greatly facilitated, efforts can be concentrated on maintaining a uniform and consistent marginal cost, which is useful to various levels of management
  • Helpful in Decision Making : -
    Make or Buy Decision
    Capturing the foreign Markets
    Change of Product Mix
    Sales Price in Normal Condition
    Determination of Minimum Price
    Temporary /permanent closure of production
    ADVANTAGE
  • DISADVANTAGES
    Normal costing systems also apply under normal operating volume and this shows that no advantage is gained by marginal costing
    Under marginal costing, stocks and work in progress are understated, the exclusion of fixed costs from inventories affect profit
  • Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories
    For long term profit planning, absorption costing is the only answer
    DISADVANTAGES