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# Marginal Costing

## on Dec 21, 2010

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## Marginal CostingPresentation 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
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 : -