University of Calicut syllabus

1. Marginal costing

2. Cost
Cost is a monetary value of
(1) effort,
(2) material
(3) resources
(4) time and utilities consumed,
(5) risk incurred and
(6) opportunity forgone in production and
delivery of a good or service

3. Types of cost
Fixed
Cost do not vary
with changing
output
Even if you produce
or don’t , this cost
remains the same
e.g. rent, insurance
Variable
This depends on the
output produced
If you produce more
cars, you must use
more materials like
metal
Semi-
variable cost
Half fixed cost half
variable
If you produce more
cars, you need to
employ more
workers; this is a
variable cost.
However, even if you
didn’t produce any
cars, you may still
need some workers
to look after empty
factory.(fixed cost)

4. Marginal Cost
• The amount at any given volume of output by
which aggregate variable costs are changed if
the volume of output is increased by one unit.
• Marginal Cost = Variable Cost =
Direct Labour + Direct Material + Direct Expenses
(prime cost)
+ Variable Overheads

5. Marginal Costing
• The ascertainment of marginal cost and of
the effect on profit of changes in volume or
type of output by differentiating between
fixed costs and variable costs.

6. Contribution
• Contribution or the contributory margin or
Gross margin is the difference between sales
value and the marginal cost
Contribution (C) = Sales (S) – Variable Cost
• It can also be defined as excess of sales
revenue over the variable cost.

7. What is contribution if?
• Variable Cost = 50, 000,
• Fixed Cost = 20,000,
• Selling Price = 80,000
• C=????

8. Therefore it can be said
C= SALES – VARIABLE COST
or
PROFIT + FIXED COST
Particulars Price per unit Total for 100 units
Sales 20 2000(100*20)
Less Variable cost 12 1200(100*12)
Contribution 8 800
Less Fixed cost - 500
Profit/loss 300

9. Characteristics of marginal costing
All cost divided into
fixed, variable and
semivarible
Variable cost is
treated as the cost
of product
Fixed cost are
charged to profit
and loss account
and not to product
The value of
finished goods and
WIP comprises of
only marginal cost
Price is decided
based on marginal
cost and
contribution margin
Profit is based on
contribution margin

10. Marginal costing
• A special technique used for managerial
decision making
• A basis for the interpretation of cost data to
measure the profitability of different products,
processes
• Cost ascertainment is made on the basis of
the nature of cost.

11. Marginal cost equation
Sales – Variable cost =Contribution
Sales= Contribution + Variable cost
Sales = Fixed cost +Profit/Loss +variable cost
Sales – Variable cost = Fixed cost
+profit/Loss

12. Marginal cost sheet
Sales xxxx
Less: Variable Cost xxxx
Contribution xxxx
Less: Fixed Cost xxxx
Profit

13. Solve
1.Sales =2000/-
Fixed cost =100/-
Profit = 300
Find variable Cost?
2.Find profit?
Selling price per unit=100
Units sold= 50 units
Variable cost= 40/-
Total fixed cost = 1000/-

14. Profit Volume Ratio
• Also called contribution ratio or marginal ratio
• Marginal Costing
• P/V Ratio =Contribution/Sales
=(Sales- variable cost) / sales
Or
(Fixed cost+ profit)/Sales
Or
Change in contribution or profit/ change in sales
HIGH P/V RATIO= HIGH PROFIT
LOW P/V RATIO= LOW PROFIT

15. Find P/V ratio
1.Selling price- Rs.100/unit
Units produced and sold- 50
Variable cost- 40/-
Total fixed cost 1000/-
2.Profit when sales is 7500/-
3.Sales when profit is 16,250/-

16. The sale and profit during two years are given:
Find P/V ratio
Sales when profit is 5,00,000
Profit when sales is 12,00,000
Variable cost of both years
Year Sales (in lakhs) Profit (in lakhs)
2002 20 2
2003 30 4

17. Cost-Volume Profit Analysis
• It studies the relationship between cost,
volume and profit- vital ingredients of profit
planning
• All three are dependent on each other
profit depends on sales…..selling price on
cost…..cost on the volume of production

18. Breakeven analysis
• The study of cost volume profit- breakeven
analysis