This document discusses the principles of marginal costing and cost behavior. It explains that there are three types of costs: variable costs that change directly with activity levels, fixed costs that do not change with activity, and semi-variable or mixed costs where part is fixed and part varies. Marginal costing involves separating total costs into variable and fixed components. Contribution is calculated as the difference between selling price and variable costs, and is used to cover fixed costs. Profit can then be determined as total contribution minus total fixed expenses. The document provides an example calculation of a marginal costing profit and loss statement and break-even analysis.

1. Cost behaviour &marginal cost
analysis
T.VENKATARAMANAN
FICWA.FCS.

2. BASIC PRINCIPLES
 The basic idea behind marginal costing is
that costs behave in different ways as the
volume of activity changes.
 There are three ways the costs behave with
in a range of activity levels which forms the
basis of Marginal Costing

3. Variable costs
 These are costs which vary in direct
proportion to the activity level. For example if
2 cft of wood is used for one table for 10
tables the wood required will be 10 X 2 cft=
20 cft.The cost /unit of article remains the
same and varies with increase in the number
of units produced.

4. Fixed costs
 These costs do not normally change when
the level of activity changes.The rent for the
factory building is the same irrespective of
the number of tables or chairs produced.It is
a fixed cost.
 In this case the total cost remains constant
but the incidence of cost /unit varies.In
marginal costing we take advantage of this
behaviour of costs.

5. Semifixed expense.
 These are costs where a part of the cost
remains fixed while a portion of the cost
varies with the change in volume..These are
called semi variable or semifixed or mixed
costs.In this case, there is a fixed standing
charge ,and a variable “unit charge”.e.g.the
set up cost is fixed but operating expenses of
the machine like power, lubricants etc
increase with the increase in operating hours.

6. costs , contribution and profits
 In marginal costing first all costs including
semivariable costs are to be bifurcated and
classified into variable and fixed costs.
 For example a car manufacturer will need to
identify 1)the variable costs of each car 2)
the total fixed cost of the manufacturing
process overa period of time.

7. contd.
 when the sale is made the selling price first
covers the variable costs and the difference
between selling price and variable costs is
accumulated , pooled to recover the total
fixed cost. This pooled balance of the selling
price is called contribution.As no profit can be
made by selling one unit,we, have to take the
total sales of the period to find out the total
contribution.
 T.C.= T.S. - T.V.C

8. THE PROFIT
 A Business can work out it's profit for any
given period from total contribution and fixed
expenses of the period .
 Profit = TC - T.F.E.

9. The marginal costing statement: an
illustration
 An apparel manufacturing company
manufactures 1000 jeans per month.The
following costs relate to that month :
 direct materials = Rs 350,000
 direct labour = 230,000
 other expenses = 310,000
 of the above ,direct material and direct labour
are variable costs.of the other expenses
270,000 is fixed and the rest are variable.

10. contd.
 It sells the jeans at Rs. 900/= per
jeans.calculate the marginal cost / jeans.
 the total contribution and the net profit for the
month

11. Marginal costing P/L.A/C
DETAILS UNITS RATE/UNIT
RS
TOTAL
RS
SALES 1000 900 900,000
DIRECT MATERIAL 1000 350 350,000
DIRECT LABOUR 1000 230 230,000
OTHER VARIABLE
EXP
1000 270 270,000
CONTRIBUTION 50 50,000
OTHER F.E 40,000

12. Break even analysis
 The point at which the total contribution equals the total fixed
expenses OR
 The total sales equals the the total cost i.e. both fixed and
variable
 The profit is ZERO.this point at which there is no profit or no
loss is called the break even point OR THE B.E.POINT in short
 In the previous illustration the contribution /unit = Rs 50/=. The
F.E. = 40,000/=
 B.E. POINT = 40,000/50 = 800 UNITS i.e. when the company
produces and sells only 800 jeans there is no profit or loss on
sales

13. What if analysis
 Marginal costing enables us to work out quickly the
profit or loss at any level of output , if we already
know the break even point and the contribution /unit
 because for every unit sold above the break even
point the profit will be equal to the contribution.
 In the above illustration if the units sold is increased
to 1100 the profit will increase by 5,000.
 on the contrary if the fixed expenses increase by
12,000/= the unit will start incurring losses of Rs
2000/= and so on.