This document provides an overview of marginal costing, including definitions, features, advantages, limitations, and differences from absorption costing. It also covers cost-volume-profit analysis, including concepts like fixed costs, variable costs, contribution, break-even point, margin of safety, and angle of incidence. Key points include: - Marginal costing focuses on additional cost of producing one more unit and is useful for short-term decision making. - It involves classifying costs as fixed or variable and calculating contribution. - Cost-volume-profit analysis examines the relationship between costs, sales volume, and profits using various metrics like break-even point. - Graphs like break-even charts can visually depict

1. MARGINAL
COSTING
ADVANCED COST AND MANAGEMENT

2. MEANING & DEFINITION

It is the additional cost of producing an
additional unit of a product.
Marginal cost= prime cost + total variable
overheads
J. BATTY: „ a technique of cost accounting which
pays special attention to the behavior of costs
with changes in the volume of output‟.

3. FEATURES OF MARGINAL
COSTING
1)
2)
3)
4)
5)
6)
7)
8)
Control or decision making
Classification
Fixed cost
Variable cost
Contribution
Profitability
Ascertain profit
Cost-volume-profit relationship

4. ADVANTAGES
1.
2.
3.
4.
5.
6.
7.
8.
Simplicity
Stock valuation
Meaningful reporting
Effect of fixed costs
Profit planning
Cost control and cost reduction
Pricing Policy
Helpful to Management

5. LIMITATIONS
1.
2.
3.
4.
5.
6.
7.
8.
9.
Classification of cost
Not suitable for external reporting
Lack of Long-term perspective
Under valuation of stock
Automation
Production aspect is ignored
Not applicable in all types of business
Misleading picture
Less scope for Long-term policy decision

6. DIFFERENCE BETWEEN MARGINAL AND ABSORPTION
COSTING
ABSORPTION COSTING
MARGINAL COSTING
CHARGING OF COST

Fixed cost form part of total cost of production
and distribution.

Variable cost alone forms part of total
cost of production and sales whereas
fixed costs are charged against
contribution for determination of
profit.

Stocks are valued at variable cost only.
VALUATION OF STOCK

Stock and work-in-progress are valued ay both
fixed and variable costs i.e, total cost.

7. ABSORPTION COSTING
MARGINAL COSTING
VARIATION IN PROFITS


If there is no sales the fixed overhead will be
treated as loss in the absence of contribution.
It is not carried forward as a part of stock
value.

It is more useful for short term managerial
desion making.

It lays emphasis on selling and pricing aspects.
When there is no sales the entire stock is
carried forward and there is no trading profit
or loss.
PURPOSE

It is more suitable for long term decision
making and for pricing policy over long term.
EMPHASIS

It lays emphasis on production.

8. COST-VOLUME-PROFIT
ANALYSIS



Cost-Volume-Profit analysis is the analysis of three
variables, i.e. cost, volume and profit.
Cost-Volume-Profit analysis helps the
management in profit planning.
Profit of a concern can be increased by increasing
the output and sales or reducing cost.
“The most significant single factor in planning of the
average business is the relationship between the
volume of business, its costs and profit.”
-HEISER

9. OBJECTIVES
Cost-Volume-Profit analysis is made with the
objective of ascertaining the following:
 The cost for various levels of production
 The desirable volume of production
 The profit at various levels of production
 The difference between sales revenue and
variable cost.

10. CONCEPTS AND TERMS
1.
2.
3.
4.
5.
6.
7.
8.
FIXED COST
VARIABLE COST
CONTRIBUTION
CONTRIBUTION TO SALES/ PRROFIT
VOLUME RATIO
BREAK EVEN ANALYSIS
MARGIN OF SAFETY
ANGLE OF INCIDENCE
BREAK EVEN CHARTS

11. FIXED COST





Total of cost like “period cost” or “time costs”
Does not depend on volume of production and
sales
Fixed costs remain constant
Fixed cost are fixed in total but variable in unit.
Eg: salary rent, manager‟s salary etc known as
fixed overheads

12. VARIABLE COST





Increase or decrease in proportion to sales
and output.
Called as „product costs‟ or „marginal costs‟
Vary in direct proportion to output.
Variable costs vary in total but they remain
constant per unit.
Eg: direct material, direct wages etc

13. CONTRIBUTION


It‟s the difference between sales and marginal
costs
Used to find profitability of products,
processes, departments and divisions.

contribution = selling price-marginal cost
 Contribution= fixed expenses + profit
 Contribution – fixed assets = profit

14. CONTRIBUTION TO SALES /
PROFIT VOLUME RATIO




Relationship between sales and contribution
High P/V ratio indicate high profitability
Low P/V ratio indicate low profitability
Expressed in percentage

P/V ratio= contribution
sales- variable
fixed costs +
profit
----------------- (or) ------------------- (or) -----------------------sales
sales
sales

When two periods, profit and sales given then,
P/V ratio = change in profits
----------------------change in sales

15. BREAK EVEN ANAYSIS AND
BREAK EVEN POINT



Relationship between revenue and costs in
relation to sales volume
Determination of volume of sales at which total
costs are equal o revenue.
MATZ CURRY & FRANK : “ a break even
analysis determines at what level cost and
revenue are in equilibrium”

16. FORMULA

BREAK EVEN POINT:
B.E.P =
fixed expenses
fixed cost
break even sales value
--------------------------------------------------------- (or) --------------------------- (or) -------------------------------selling price per unit- marginal cost per unit

contribution per unit
selling price per unit
BREAK EVEN POINT OR BREAK EVEN SALES VALUE
B.E.S.V= break even point in units * salling price per unit (or) =
fixed cost
---------------P / V ratio
Break even ratio = break even sales
---------------------- * 100
actual sales

COMPOSITE BREAK EVEN POINT
Composite break even point in value = total fixed cost
---------------------------------------------------------------------------------------------------Composite p/v ratio (= individual PV ratio * % of each product to total sales)
Break even capacity or break even point:
capacity B.E.P =
B.E.P in units
break even point in rupees
-------------------------------- * 100 (or) -----------------------------------total capacity in rupees
*100
total capacity in rupees

17. MARGIN OF SAFETY




Difference between actual sales and break even
sales.
Indicate value/volume of sales which directly
contribute to profit
Expressed in rupees, units or even in percentage
margin of safety= actual sales- break even sales
(or)
= profit
--------P V ratio
Margin of safety ratio: expressed in ratio
Margin of safety ratio= margin of safety/ actual sales*
100


18. ANGLE OF INCIDENCE





Graphic presentation of marginal cost data
The angle at which the sales line crosses the
total cost line is called the „angle of incidence‟
Bigger angle gives more contribution and profit
with additional sale
High P/V ratio and comparatively less variable
cost= high angle of incidence
Eg: break-even chart

19. BREAK EVEN CHARTS


Graphical representation of marginal costing
Show inter-relation between cost, volume &
profit

20. Thank u……..