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# Marginal Costing

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• that included the variable cost only
• ### Marginal Costing

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