Marginal Costing-Cost Management

1. A special Lecturer Series on Marginal
Costing
Dr.NANDISHA H D
Associate Professor
Darshan First Grade Evening
College
HVR Layout, Bengaluru
On 17-05-2021, Monday
St.Claret College, Bengaluru
6.6: Cost Management
Unit:2 Marginal Costing

2. INTRODUCTION TO MARGINALCOSTING

3. Intended Learning Outcomes
• At the end of the chapter, you will able to
1. To understand the basic concepts of marginal cost and marginal
costing.
2. To understand the difference between theAbsorption costing and
Marginal Costing.
3. To learn the practical applications of Marginal costing.
4. To understand Breakeven charts & Limitation

4. Techniques of Costing
1. Marginal Costing
2. Absorption Costing / Traditional Costing

5. Marginal Cost
• Marginal Cost is defined as, ‘ the change in aggregate costs due
to change in the volume of production by one unit.
• The marginal cost of a product is its “Variable cost”
• Marginal cost per unit of a product consists of:
xx
xx
xx
xx
Direct Material
Direct Labour
Direct Expenses
Variable part of overhead
Marginal cost per unit xx

6. Marginal Costing
• Marginal Costing has been defined as, ‘Ascertainment of cost
and measuring the impact on profits of the change in the volume
of output or type of output.
• Marginal costing is a very useful technique of costing for
decision-making.
• In marginal costing, costs are segregated into fixed and variable

7. Marginal Costing is formally defined as:
•The accounting system in which variable cost
are charged to cost units and the fixed costs of
the period are written- off in full against the
aggregate contribution.(Terminology)

9. Contribution
• Contribution is the difference between the sale value and the
marginal cost of sales.
• Total contribution = Total Revenue- Total variable cost
• C=S-VC
• C=FC+P
• C=FC-L
• C=S x P/V Ratio
• It is a central concepts in marginal costing.
• However , the term “contribution” is really short for describing
“ contribution towards covering fixed overheads and making
profit”

10. Formulas used in Marginal Costing
Main Formula (When the production is n units)
Sn – Vn = F + Pn
C = F + P
C=FC-Loss
Where ,
S = Selling Price
V = Variable cost of n units F = Fixed
cost
P = Profit of n units

11. •Total contribution > Fixed cost = Profit
•Total contribution = Fixed cost = BEP(neither
profit nor loss)
•Total contribution < Fixed cost = Loss

12. ContributionSales Ratio/Profit volume Ratio(P/V
Ratio
• The contribution margin per unit expressed as a percentage of
the selling price per unit.
• Contribution to sales ration ( C/S Ration , P/V Ratio)
• Contribution *100
sales
• Changes in contribution/ profit or loss
Changes in Sales
X 100

13. Break EvenAnalysis / CVPAnalysis
•Breakeven analysis is the study of the relationship
between selling prices, sales volumes, fixed costs,
variable costs and profits at various levels of activity
•The Break Even Point is a level of production where
the total costs are equal to the total revenue. Thus at
the break even level, there is neither profit nor loss
•The point where total contribution margin equals total
fixed costs.

14. FoundationalAssumption in CVP
1. All costs can be classified into fixed & variable
elements.
2. Fixed cost will remain constant & the variable cost vary
with production levels
3. Selling price, variable cost per unit & fixed costs are all
known & constant
4. Over the activity range being considered costs &
revenue behaved in a liner fashion
5. The technology, production &efficiency remain
unchanged
6. The time value of money is ignored.
7. There is no change in stock level.

15. Break EvenAnalysis can be done in two ways:
1. Equation approach
2. Graphical approach

16. Equation approach to Break EvenAnalysis
• Break Even Points = Fixed Cost
(Units) Contribution per unit
Break Even Points( Rs.) = Fixed Costs
C/S Ratio or P/V Ratio
= BEP Unit * Selling price
Level of sales to achieve a target profit = Profit + Fixed cost
Contribution

17. Margin of safety
•Margin of safety (MOS) measures the
between budgeted sales and breakeven sales.
distance
•MOS = Budgeted Sales – BE Sales
•MOS=P/P/V Ratio
•P=MOS X P/V Ratio

18. Graphical approach to Break EvenAnalysis
•The graphical approach may be prefer when a simple
overview is sufficient or when greater visual impact is
required .e.g.Areport given for a manager.
•The basic chart is known as a break even and can be
drawn in two ways.
1. Traditional approach
2. Contribution approach

19. Traditional Break Even Chart
•This is prepared by drawing the following
curves.
I. Fixed cost
II. Total cost
III. Total Revenue

20. Traditional Break Even Chart

21. Contribution Break Even Chart
•In order to prepare the contribution chart following
curves should be drawn
1. Total cost curve
2. Variable cost curve
3. Total revenue curve

22. Alternative form of contribution break even
chart
•Following alternative curves can be drawn to
illustrate break even pint using contribution
chart.
1. Contribution curve
2. Fixed cost curve

23. Profit Chart
•Under this method of CVP analysis, only profit
or loss curve is drawn in order to identify the
break even level.
•Profit graph that focuses more directly on how
profits change with changes in volume.

24. Limitation of Break Even Chart
•Aliner relationship does not always exist.
•We assume that a company manufactures only
one product . In reality, a company may
produce two or more product.
•We focus on short period where the fixed cost is
fixed. However , in the long run fixed cost
varies.
•We assume that technology and other factors
does not change.

25. EX: You are given the following data for the year 2021 of
COVID Ltd.
Sales Rs.10, 00,000, variable cost Rs.6, 00,000 and fixed cost
Rs.3,00,000
Find: P/V Ratio, Break Even point, Margin of safety
Particulars Amount
Sales
(-)Variable cost
Contribution
(-) Fixed cost
Profit or EBIT
10,00,000
6,00,000
--------------
4,00,000
3,00,000
--------------
1,00,000

26. Contribution
1. P/V Ratio= ---------------------X100
Sales
4,00,000
P/V Ratio= ---------------------X100
10,00,000
P/V Ratio= 40%
Fixed Cost
2. Break Even Point= ----------------X100
P/V Ratio
3,00,000
Break Even Point= ----------------X100
40
Break Even Point= Rs.7,50,000
3. Margin of Safety=Actual sales-Breakeven sales
MOS=10,00,000-7,50,000=Rs.2,50,000

27. 1. If fixed costs are Rs.40,000. Variable cost Rs.2 per unit and Selling price Rs.10,
what will be the Break Even Point?
Ans: FC Rs.40, 000, VC Rs.2, SP Rs.10
Contribution=Sales-Variable cost
Contribution=10-2=8
Contribution
a. P/V Ratio= ---------------------X100
Sales
8
P/V Ratio= ---------X100
10
P/V Ratio =80%
Fixed Cost
b. Break Even Point= ----------------
P/V Ratio
40,000
BEP= --------------X100
80
BEP=Rs.50, 000

28. 2. When sales are Rs.5, 00,000 and Profit volume ratio is
50%, variable cost will be.
•Contribution= Sales X P/V Ratio
5, 00,000X0.50=2, 50,000
•Variable cost=Sales-Contribution
5, 00,000-2, 50,000=2, 50,000
Variable cost=Rs.2, 50,000

29. 3. Given information, fixed cost Rs.75,000, Sales
Rs.3,00,000, Direct materials Rs.1,00,000, Direct
Labour Rs.60,000 and Direct expenses Rs.40,000.Find
BEP.
Contribution=Sales-Variable cost
C=3,00,000-1,00,000+60,000+40,000
C=3,00,000-2,00,000
C=1,00,000

30. Contribution
•P/V Ratio= ---------------------X100
Sales
1, 00,000
P/V Ratio= -------------------X100
3, 00,000
P/V Ratio=33.33%
Fixed Cost
•Break Even Point= ----------------
P/V Ratio
75,000
BEP= -----------------------x100
33.33
BEP= Rs.2, 25,000

31. What will its P/V Ratio?
Ans:
Change in Profit or EBIT
P/V Ratio= -------------------------------X100
Change in Sales
1
P/V Ratio= -------------------------------X100
5
P/V Ratio= 20%
Particulars 2020 2021
Sales 20 lakhs 25 lakhs
EBIT 4 lakhs 5 lakhs
4:Given

32. 5. If P/V Ratio is 40%, Sales is Rs.1,00,000 and Fixed
Cost is Rs.35,000. What is the Profit?
Contribution= Sales X P/V Ratio
C=1, 00,000X 0.40
C=Rs.40, 000
 Variable cost=Sales-Contribution
VC=1, 00,000-40,000
VC=Rs.60, 000
Profit=Contribution-Fixed Cost
P=40,000-35,000
Profit=Rs.5,000

33. Change in Profit or EBIT
P/V Ratio= ----------------------------------X100
Change in Sales
10,000
P/V Ratio= -------------------------------X100
50,000
P/V Ratio= 20%
Contribution=Sales of 2020 X P/V Ratio
1, 00,000X 0.20
Contribution=Rs.20, 000
Particulars 2020 2021
Sales 1,00,000 1,50,000
Profit 10,000 20,000
6.Given, find P/V Ratio, Fixed Cost, sales when profit is Rs.30,000

34. Fixed Cost=Contribution-Profit of 2020
=20,000-10,000
Fixed cost=Rs.10,000
Fixed Cost+ Desired Profit
Sales= ---------------------------------X100
P/V ratio
10,000+30,000
Sales= ---------------------------------X100
20
Sales=Rs.2, 00,000
Fixed Cost
Break Even Point= ----------------
P/V Ratio
10,000
BEP= -----------------------x100
20
BEP= Rs.50,000

35. 7. From the following particulars. Calculate contribution, BEP in units and
what will be selling price per unit if BEP is brought down to 25,000 units. If
fixed Expenses is Rs.1,50,000, Variable cost per unit Rs.10 and Selling price
per unit Rs.15.
Ans:
Contribution per unit=Sales per unit- variable cost per unit
CPU=15-10=5
Fixed Cost
Break Even Point in units= --------------------------
Contribution per unit
1, 50,000
BEP= --------------
5
BEP= 30,000 units

36. Fixed Cost
Break Even Point in units= --------------------------
Contribution per unit
1, 50,000
25,000= --------------
CPU
1,50,000
CPU = --------------
25,000
CPU=Rs.6
New selling price per unit=Variable cost per unit+ new contribution
per unit
=10+6
NSPPU=16

37. 8. From the following information selling price per unit Rs.25,
variable cost per unit Rs.15,
total fixed cost Rs.2, 00,000.
a. What is P/V Ratio?
b. What is BEP in units?
c. What is sales value where there is neither profit nor loss?
d. What is the sales in units required to earn a profit of
Rs.1,00,000?
e. What is the profit when sales is Rs.10,00,000?

38. Answer:
Contribution per unit=sales per unit-variable cost per unit
C=25-15=10
Contribution per unit
P/V Ratio= ---------------------------------X100
Sales per unit
10
P/V Ratio= -------------------X100
25
P/V Ratio=40%
Fixed Cost
Break Even Point in units= ----------------------------
Contribution per unit
2, 00,000
BEP= -----------------------X100
10
BEP= 20,000 Units

39. Break even sales
Break even sales= BEP in units X selling price per units
BES=20,000X 25
BES=5, 00,000
Sales in units required to earn a profit of Rs.1,00,000
Fixed Cost+ Desired Profit
Sales= ---------------------------------X100
Contribution per unit
2, 00,000+1, 00,000
Sales= ---------------------------------X100
10
Sales in units= 30,000 units

40. The profit when sales is Rs.10,00,000
Fixed Cost+ Desired Profit
Sales= ---------------------------------X100
P/V Ratio
2, 00,000+X
10, 00,000= ---------------------------------
0. 40
4, 00,000=2, 00,000+X
X=4, 00,000-2, 00,000
X=2, 00,000

41. Absorption costing & Marginal Costing
•Absorption costing :It is a costing system which treats
all manufacturing costs including both the fixed and
variable costs as product costs
•Marginal Costing: It is a costing system which treats
only the variable manufacturing costs as product costs.
The fixed manufacturing overheads are regarded as
period cost

42. Absorption costing
Rs.
Marginal costing
Rs.
Sales X Sales X
Less: Cost of goods sold X Less: Variable cost of
Goods sold X
Gross profit X Product contribution margin X
Less: Expenses
Selling expenses X
Admin. expenses X
Other expenses X X
Less: variable non- manufacturing
expenses
Variable selling expenses X
Variable admin. expenses X
Other variable expenses X
Variable and fixed manufacturing Total contribution expenses X
Less: Expenses
Fixed selling expenses
Fixed admin. expenses
Other fixed expenses
X Net Profit
X
X
X
X
Net Profit

43. 9. From the following information, prepare an income
statement under(A) Marginal costing and (B) Absorption
Particular X (Rs)
Direct material
Direct wages
Factory overhead----Fixed
Variable
Selling overhead -----Fixed
Variable
Sales
15,000
18,000
6,000
7,800
3,000
4,200
64,000

44. Particular X (Rs)
Sales
Total-A
Variable costs:
Direct material
Direct wages
Variable overhead:
Factory
Selling
Total variable cost(B)
Contribution(A-B)
Less: Fixed Cost(factory and selling) (6,000+3,000)
Profit
64,000
--------
64,000
---------
15,000
18,000
7,800
4,200
----------
45,000
-----------
19,000
9,000
------------
10,000
Income statement under Marginal Costing

45. Income statement under Absorption Costing
Particular X (Rs)
Direct material
Direct wages
Prime cost
Factory overhead----Fixed
Variable
Work cost
Selling overhead -----Fixed
Variable
Total cost
+ Profit(Balancing figure)
Sales
15,000
18,000
---------
33,000
6,000
7,800
---------
46,800
3,000
4,200
---------
54,000
10,000
-----------
64,000

46. Marginal Costing Absorption Costing
Costs are classified as fixed
& variable
Costs are classified as
direct & indirect
The year end inventory is
valued at variable cost
only.
The year end inventory of
finished goods valued at
total cost.
The fixed overheads are
charged directly to the
costing profit loss account
and not absorbed in the
product units.
The fixed overheads are
not charged directly to the
costing profit loss account
and absorbed in the
product units.

47. Any Questions

48. Thank you
Dr.NANDISHA H D
M.Com,MBA,NET-JRF,K-SET in
Commerce and K-SET in
Management
nandishahd@gmail.com
nandishahd@yahoo.co.in
9164871339/8660527076