This document provides an overview of cost-volume-profit (CVP) analysis, including definitions, assumptions, components and graphs used. CVP analysis studies how costs, volume and prices impact profits. It assumes costs can be separated into fixed and variable portions. The key aspects covered are the linear relationships between total costs/revenue, calculating break-even point, and how profits are affected by changes in volume, price, variable costs and fixed costs. Utility and limitations of CVP analysis are also discussed.
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This document discusses different types of costs and their classification. It begins by defining direct and indirect costs, as well as fixed and variable costs. Direct costs include direct materials, direct labor, and direct expenses that can be traced to a specific product. Indirect costs cannot be traced to a specific product. Fixed costs remain constant regardless of production volume, while variable costs change in proportion to production volume.
It then discusses how costs are classified for different purposes, such as stock valuation, decision-making, and control. For stock valuation, costs are classified as product costs (included in inventory valuation) or period costs (expensed immediately). For decision-making, costs are classified as relevant (those that change with a decision
The document provides notes on process costing systems, costing of joint and by-products, marginal and absorption costing, cost-volume-profit analysis using both the contribution margin and break-even approaches, and margin of safety. It discusses two methods for process costing, bases for allocating joint costs, the treatment of fixed costs under marginal and absorption costing, assumptions and formulas for cost-volume-profit analysis, and defines margin of safety and the margin of safety ratio.
This document discusses different types of costs including fixed costs, variable costs, and semi-variable costs. It defines fixed costs as those that do not vary with output over a short period of time, variable costs as those that change directly with output volume, and semi-variable costs as being partly fixed and partly variable. Marginal costing is then introduced as a technique that analyzes costs and profits based on how they change with increases or decreases in output volume, differentiating between fixed and variable costs. The key assumptions and uses of marginal costing are also summarized.
This document provides an overview of marginal costing and cost-volume-profit (CVP) analysis. It defines key terms like marginal cost, contribution, fixed and variable costs. It explains the differences between marginal and absorption costing approaches. The objectives and concepts of CVP analysis are outlined, including break-even point, margin of safety, contribution ratio and angle of incidence. Formulas for calculating items like break-even sales, break-even point and composite break-even point are presented. Advantages and limitations of marginal costing are listed.
Chapter 16-marginal-costing and cvp analysisAshvin Vala
Marginal costing and CVP analysis are important management accounting techniques. Marginal costing involves separating total costs into fixed and variable components. It focuses on variable costs and marginal costs. CVP analysis examines the relationship between costs, volume, and profits. It is used to determine the break-even point and margin of safety. CVP provides important information for decision-making, budgeting, pricing, and performance evaluation.
Marginal costing is a type of flexible standard costing that separates fixed costs from variable costs. It is a comprehensive method for planning and monitoring costs based on resource drivers. Marginal costing ensures cost fluctuations from changes in operating levels are accurately predicted and incorporated into variance analysis. It has become widely accepted in business over the last 50 years. Marginal cost is the change in total cost from producing one more unit. It includes any additional costs to produce the next unit and varies depending on production levels and time periods considered. The relationship between marginal cost and economies of scale depends on whether average or marginal costs are falling or rising with production. Externalities can cause private and social costs to diverge.
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
Website Development Company is fastest growing company in the IT market for the website design and development. we are best website development company in India as well as in USA we are based in Noida and Delhi NCR. Website development company is powered by Css Founder.com
This document discusses different types of costs and their classification. It begins by defining direct and indirect costs, as well as fixed and variable costs. Direct costs include direct materials, direct labor, and direct expenses that can be traced to a specific product. Indirect costs cannot be traced to a specific product. Fixed costs remain constant regardless of production volume, while variable costs change in proportion to production volume.
It then discusses how costs are classified for different purposes, such as stock valuation, decision-making, and control. For stock valuation, costs are classified as product costs (included in inventory valuation) or period costs (expensed immediately). For decision-making, costs are classified as relevant (those that change with a decision
The document provides notes on process costing systems, costing of joint and by-products, marginal and absorption costing, cost-volume-profit analysis using both the contribution margin and break-even approaches, and margin of safety. It discusses two methods for process costing, bases for allocating joint costs, the treatment of fixed costs under marginal and absorption costing, assumptions and formulas for cost-volume-profit analysis, and defines margin of safety and the margin of safety ratio.
This document discusses different types of costs including fixed costs, variable costs, and semi-variable costs. It defines fixed costs as those that do not vary with output over a short period of time, variable costs as those that change directly with output volume, and semi-variable costs as being partly fixed and partly variable. Marginal costing is then introduced as a technique that analyzes costs and profits based on how they change with increases or decreases in output volume, differentiating between fixed and variable costs. The key assumptions and uses of marginal costing are also summarized.
This document provides an overview of marginal costing and cost-volume-profit (CVP) analysis. It defines key terms like marginal cost, contribution, fixed and variable costs. It explains the differences between marginal and absorption costing approaches. The objectives and concepts of CVP analysis are outlined, including break-even point, margin of safety, contribution ratio and angle of incidence. Formulas for calculating items like break-even sales, break-even point and composite break-even point are presented. Advantages and limitations of marginal costing are listed.
Chapter 16-marginal-costing and cvp analysisAshvin Vala
Marginal costing and CVP analysis are important management accounting techniques. Marginal costing involves separating total costs into fixed and variable components. It focuses on variable costs and marginal costs. CVP analysis examines the relationship between costs, volume, and profits. It is used to determine the break-even point and margin of safety. CVP provides important information for decision-making, budgeting, pricing, and performance evaluation.
Marginal costing is a type of flexible standard costing that separates fixed costs from variable costs. It is a comprehensive method for planning and monitoring costs based on resource drivers. Marginal costing ensures cost fluctuations from changes in operating levels are accurately predicted and incorporated into variance analysis. It has become widely accepted in business over the last 50 years. Marginal cost is the change in total cost from producing one more unit. It includes any additional costs to produce the next unit and varies depending on production levels and time periods considered. The relationship between marginal cost and economies of scale depends on whether average or marginal costs are falling or rising with production. Externalities can cause private and social costs to diverge.
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
Marginal costing is a technique that classifies costs as either fixed or variable. Variable costs are considered the marginal costs and are charged to each unit, while fixed costs are written off for the period. Marginal cost is calculated as direct material + direct labor + direct expenses + variable overheads. It is used to determine the additional cost of producing one more unit and to understand the impact of variable costs on output volume. Marginal costing helps with managerial decisions like product profitability or order acceptance by considering only the additional variable costs.
This document summarizes absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including both fixed and variable costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs, regarding fixed costs as period costs. Absorption costing follows generally accepted accounting principles but may distort profits, while marginal costing is more relevant for decision making but can manipulate profits. Breakeven analysis uses cost-volume concepts to determine sales needed to cover total costs and achieve a target profit level.
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
Marginal costing focuses on variable costs and contribution margins to make decisions. It excludes fixed costs which do not change with production volume. The key concepts include contribution, break-even point, margin of safety, and relevant costs and revenues for decision making. Marginal costing is useful for pricing, product mix optimization, make-or-buy decisions, and other situations involving incremental costs and revenues. Case studies are provided to illustrate how to apply marginal costing principles to different business decisions.
The document discusses marginal costing and cost-volume-profit (CVP) analysis techniques for decision making. It defines marginal costing as the separation of total costs into fixed and variable costs to understand the effect of changes in output on profit. The key assumptions and terminologies of marginal costing like contribution, break-even point, profit-volume ratio, and margin of safety are explained. CVP analysis expresses the relationship between sales volume, costs, and profits and can be used to answer questions about break-even revenues, effects of price and cost changes, and achieving budgeted profit levels.
Marginal costing considers fixed costs as period costs and does not apportion them. It reduces total period costs from total contribution to arrive at net profit. The results are the same as total costing, only the presentation differs. Semi-variable costs have fixed and variable components. Marginal costing is defined as accounting that charges variable costs to cost units and writes off fixed costs against aggregate contribution. Contribution is sales minus marginal costs. Profit-volume ratio measures profitability as contribution over sales. Break-even point is when contribution equals fixed costs. Marginal costing supports managerial decision making by evaluating a concern's position.
- Absorption costing and variable costing are two approaches to product costing. Absorption costing treats all manufacturing costs, including fixed overhead, as product costs. Variable costing only includes variable production costs as product costs and treats fixed overhead as a period cost.
- The main differences are that absorption costing includes fixed manufacturing overhead as a product cost, while variable costing treats it as a period cost. Also, variable costing statements present expenses by behavior (variable vs. fixed) rather than function.
- Variable costing is more appropriate for internal decision making and analysis like break-even analysis, while absorption costing is appropriate for external financial reporting in accordance with GAAP.
This document discusses cost analysis and cost concepts. It provides definitions of cost, including how costs are influenced by factors like output, price of inputs, technology, and managerial efficiency. It then defines and explains various cost concepts used in business like opportunity costs, fixed vs variable costs, sunk costs, etc. Finally, it discusses cost-output relationships and how total, average, and marginal costs change with different levels of output in the short run.
Cost-volume-profit analysis makes assumptions that total costs can be divided into fixed and variable components, and that revenues and costs change linearly with output units. It also assumes selling prices, variable costs, and fixed costs remain constant. The analysis can cover a single product or assume a constant sales mix if multiple products are involved, and it does not consider the time value of money. The breakeven point is where total revenues equal total costs, and is calculated by setting variable expenses plus fixed expenses equal to total revenues.
This document provides an overview of marginal costing. It begins with an introduction to marginal costing, defining it as a technique that differentiates between fixed and variable costs. It then covers key aspects of marginal costing including its meaning, features, advantages, and disadvantages. Examples of how marginal costing can be used for decision making are also provided. The document concludes with sections on absorption costing, the differences between marginal and absorption costing, contribution analysis, break-even analysis, and cost-volume-profit analysis.
Marginal costing is a technique that differentiates between fixed and variable costs. It assigns only variable costs to cost units and writes off fixed costs for the period against total contribution. Contribution is calculated as sales revenue minus variable costs. Marginal costing is useful for decision making as it shows the effect on profit of changes in volume or product mix. Key aspects include classifying costs, calculating contribution, and using contribution to determine the break-even point where total revenues equal total costs. Marginal costing provides information on product and segment profitability without needing to allocate fixed overhead costs.
Marginal costing is a technique that differentiates between fixed and variable costs. It treats variable costs as product costs and fixed costs as period costs. Under marginal costing, only variable costs are considered in inventory valuation. Absorption costing treats both fixed and variable costs as product costs and includes a share of fixed costs in inventory valuation. The chapter provides definitions and concepts related to marginal costing, characteristics that distinguish it from absorption costing, and how profit is calculated differently under each method.
The document discusses key concepts in marginal costing such as marginal cost, marginal costing, direct costing, absorption costing, contribution, profit volume analysis, limiting/key factors, break even analysis, and profit volume charts. It provides definitions and explanations of these terms. It also compares absorption costing and marginal costing, highlighting differences in how they treat fixed and variable costs, inventory valuation, and measurement of profitability. Examples are given to illustrate calculation of contribution, profit-volume ratio, break even point using algebraic method, and profit at different sales volumes. The document is an overview of important concepts in marginal costing used for management decision making.
Marginal costing is an accounting technique that charges variable costs to cost units while writing off fixed costs for the period. It is useful for short-term decision making where fixed costs are excluded. There are four main applications of marginal costing: cost control, profit planning, performance evaluation, and decision making. Marginal costing can help with decisions like fixing selling prices, making or buying, selecting an optimal product mix, and understanding the effect of changes in sales price.
The document discusses concepts related to marginal cost, contribution, break-even analysis, and profit-volume ratio. It provides examples and calculations to illustrate these concepts. Marginal cost is defined as the change in total cost from producing one additional unit of output. Contribution is the difference between sales revenue and marginal cost. Break-even point is where total sales equal total costs, resulting in no profit or loss. Profit-volume ratio examines the relationship between contribution and sales volume.
Marginal costing is a technique that classifies costs into fixed and variable costs. Only variable costs are considered in calculating the cost per unit of a product. The difference between sales revenue and variable costs is known as the contribution, which is used to cover fixed costs and determine profitability. Marginal costing helps managers make decisions around pricing, production levels, and profitability by focusing on the relationship between contribution and sales volume. The breakeven point is where total sales revenue equals total costs, indicating no profit or loss.
MARGINAL COSTING AS A TOOL FOR DECISION MAKINGShubham Boni
DON'T FORGET TO LIKE AND SHARE THE PRESENTATION.
MARGINAL COST:-
“Marginal cost is the additional cost of producing an additional unit of product.”
MARGINAL COSTING:-
“In Marginal costing technique, only variable costs are charged as product costs and included in inventory valuation.”
MARGINAL COSTING HELPS IN DECISION MAKING:-
1.Fixation of Selling Price.
2.Exploring New markets.
3.Make or buy decisions.
4.Product mix
5.Operate plant or shut down.
CASE STUDY 1:-
MAKE OR BUY DECISION.
CASE STUDY 2:-
PRODUCT MIX.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
This document provides an overview of cost-volume-profit (CVP) analysis. It defines CVP analysis and notes that it is used to study how profits change with volume, costs, and prices. The key assumptions of CVP analysis are described, including constant unit costs and prices. The components of a CVP analysis, including fixed costs, variable costs, sales price, and contribution margin, are defined. The relationships between these components in a CVP graph and chart are explained. The document then discusses how profits are affected by changes in volume, price, variable costs, fixed costs, and combinations of factors. It also covers the utility and limitations of CVP analysis and break-even charts.
Marginal costing is a technique where only variable costs are treated as product costs and fixed costs are treated as period costs. It focuses on marginal cost and contribution margin. Absorption costing is a technique where both fixed and variable costs are treated as product costs. Three key differences are:
1) In marginal costing, only variable costs are considered as inventory costs while in absorption costing, both fixed and variable costs are considered as inventory costs.
2) Profits are calculated based on contribution in marginal costing while in absorption costing, profits are calculated by deducting total costs from sales.
3) Inventory valuation and profit determination methods are different between the two techniques.
Marginal costing is a technique that classifies costs as either fixed or variable. Variable costs are considered the marginal costs and are charged to each unit, while fixed costs are written off for the period. Marginal cost is calculated as direct material + direct labor + direct expenses + variable overheads. It is used to determine the additional cost of producing one more unit and to understand the impact of variable costs on output volume. Marginal costing helps with managerial decisions like product profitability or order acceptance by considering only the additional variable costs.
This document summarizes absorption costing and marginal costing. Absorption costing treats all manufacturing costs, including both fixed and variable costs, as product costs. Marginal costing treats only variable manufacturing costs as product costs, regarding fixed costs as period costs. Absorption costing follows generally accepted accounting principles but may distort profits, while marginal costing is more relevant for decision making but can manipulate profits. Breakeven analysis uses cost-volume concepts to determine sales needed to cover total costs and achieve a target profit level.
A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
To understand the basic concepts of marginal cost and marginal costing.
To understand the difference between the Absorption costing and Marginal Costing.
To learn the practical applications of Marginal costing.
To understand Breakeven charts & Limitation
Marginal costing focuses on variable costs and contribution margins to make decisions. It excludes fixed costs which do not change with production volume. The key concepts include contribution, break-even point, margin of safety, and relevant costs and revenues for decision making. Marginal costing is useful for pricing, product mix optimization, make-or-buy decisions, and other situations involving incremental costs and revenues. Case studies are provided to illustrate how to apply marginal costing principles to different business decisions.
The document discusses marginal costing and cost-volume-profit (CVP) analysis techniques for decision making. It defines marginal costing as the separation of total costs into fixed and variable costs to understand the effect of changes in output on profit. The key assumptions and terminologies of marginal costing like contribution, break-even point, profit-volume ratio, and margin of safety are explained. CVP analysis expresses the relationship between sales volume, costs, and profits and can be used to answer questions about break-even revenues, effects of price and cost changes, and achieving budgeted profit levels.
Marginal costing considers fixed costs as period costs and does not apportion them. It reduces total period costs from total contribution to arrive at net profit. The results are the same as total costing, only the presentation differs. Semi-variable costs have fixed and variable components. Marginal costing is defined as accounting that charges variable costs to cost units and writes off fixed costs against aggregate contribution. Contribution is sales minus marginal costs. Profit-volume ratio measures profitability as contribution over sales. Break-even point is when contribution equals fixed costs. Marginal costing supports managerial decision making by evaluating a concern's position.
- Absorption costing and variable costing are two approaches to product costing. Absorption costing treats all manufacturing costs, including fixed overhead, as product costs. Variable costing only includes variable production costs as product costs and treats fixed overhead as a period cost.
- The main differences are that absorption costing includes fixed manufacturing overhead as a product cost, while variable costing treats it as a period cost. Also, variable costing statements present expenses by behavior (variable vs. fixed) rather than function.
- Variable costing is more appropriate for internal decision making and analysis like break-even analysis, while absorption costing is appropriate for external financial reporting in accordance with GAAP.
This document discusses cost analysis and cost concepts. It provides definitions of cost, including how costs are influenced by factors like output, price of inputs, technology, and managerial efficiency. It then defines and explains various cost concepts used in business like opportunity costs, fixed vs variable costs, sunk costs, etc. Finally, it discusses cost-output relationships and how total, average, and marginal costs change with different levels of output in the short run.
Cost-volume-profit analysis makes assumptions that total costs can be divided into fixed and variable components, and that revenues and costs change linearly with output units. It also assumes selling prices, variable costs, and fixed costs remain constant. The analysis can cover a single product or assume a constant sales mix if multiple products are involved, and it does not consider the time value of money. The breakeven point is where total revenues equal total costs, and is calculated by setting variable expenses plus fixed expenses equal to total revenues.
This document provides an overview of marginal costing. It begins with an introduction to marginal costing, defining it as a technique that differentiates between fixed and variable costs. It then covers key aspects of marginal costing including its meaning, features, advantages, and disadvantages. Examples of how marginal costing can be used for decision making are also provided. The document concludes with sections on absorption costing, the differences between marginal and absorption costing, contribution analysis, break-even analysis, and cost-volume-profit analysis.
Marginal costing is a technique that differentiates between fixed and variable costs. It assigns only variable costs to cost units and writes off fixed costs for the period against total contribution. Contribution is calculated as sales revenue minus variable costs. Marginal costing is useful for decision making as it shows the effect on profit of changes in volume or product mix. Key aspects include classifying costs, calculating contribution, and using contribution to determine the break-even point where total revenues equal total costs. Marginal costing provides information on product and segment profitability without needing to allocate fixed overhead costs.
Marginal costing is a technique that differentiates between fixed and variable costs. It treats variable costs as product costs and fixed costs as period costs. Under marginal costing, only variable costs are considered in inventory valuation. Absorption costing treats both fixed and variable costs as product costs and includes a share of fixed costs in inventory valuation. The chapter provides definitions and concepts related to marginal costing, characteristics that distinguish it from absorption costing, and how profit is calculated differently under each method.
The document discusses key concepts in marginal costing such as marginal cost, marginal costing, direct costing, absorption costing, contribution, profit volume analysis, limiting/key factors, break even analysis, and profit volume charts. It provides definitions and explanations of these terms. It also compares absorption costing and marginal costing, highlighting differences in how they treat fixed and variable costs, inventory valuation, and measurement of profitability. Examples are given to illustrate calculation of contribution, profit-volume ratio, break even point using algebraic method, and profit at different sales volumes. The document is an overview of important concepts in marginal costing used for management decision making.
Marginal costing is an accounting technique that charges variable costs to cost units while writing off fixed costs for the period. It is useful for short-term decision making where fixed costs are excluded. There are four main applications of marginal costing: cost control, profit planning, performance evaluation, and decision making. Marginal costing can help with decisions like fixing selling prices, making or buying, selecting an optimal product mix, and understanding the effect of changes in sales price.
The document discusses concepts related to marginal cost, contribution, break-even analysis, and profit-volume ratio. It provides examples and calculations to illustrate these concepts. Marginal cost is defined as the change in total cost from producing one additional unit of output. Contribution is the difference between sales revenue and marginal cost. Break-even point is where total sales equal total costs, resulting in no profit or loss. Profit-volume ratio examines the relationship between contribution and sales volume.
Marginal costing is a technique that classifies costs into fixed and variable costs. Only variable costs are considered in calculating the cost per unit of a product. The difference between sales revenue and variable costs is known as the contribution, which is used to cover fixed costs and determine profitability. Marginal costing helps managers make decisions around pricing, production levels, and profitability by focusing on the relationship between contribution and sales volume. The breakeven point is where total sales revenue equals total costs, indicating no profit or loss.
MARGINAL COSTING AS A TOOL FOR DECISION MAKINGShubham Boni
DON'T FORGET TO LIKE AND SHARE THE PRESENTATION.
MARGINAL COST:-
“Marginal cost is the additional cost of producing an additional unit of product.”
MARGINAL COSTING:-
“In Marginal costing technique, only variable costs are charged as product costs and included in inventory valuation.”
MARGINAL COSTING HELPS IN DECISION MAKING:-
1.Fixation of Selling Price.
2.Exploring New markets.
3.Make or buy decisions.
4.Product mix
5.Operate plant or shut down.
CASE STUDY 1:-
MAKE OR BUY DECISION.
CASE STUDY 2:-
PRODUCT MIX.
Marginal costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of cost, while the fixed cost for the period is completely written off against the contribution.
This document provides an overview of cost-volume-profit (CVP) analysis. It defines CVP analysis and notes that it is used to study how profits change with volume, costs, and prices. The key assumptions of CVP analysis are described, including constant unit costs and prices. The components of a CVP analysis, including fixed costs, variable costs, sales price, and contribution margin, are defined. The relationships between these components in a CVP graph and chart are explained. The document then discusses how profits are affected by changes in volume, price, variable costs, fixed costs, and combinations of factors. It also covers the utility and limitations of CVP analysis and break-even charts.
Marginal costing is a technique where only variable costs are treated as product costs and fixed costs are treated as period costs. It focuses on marginal cost and contribution margin. Absorption costing is a technique where both fixed and variable costs are treated as product costs. Three key differences are:
1) In marginal costing, only variable costs are considered as inventory costs while in absorption costing, both fixed and variable costs are considered as inventory costs.
2) Profits are calculated based on contribution in marginal costing while in absorption costing, profits are calculated by deducting total costs from sales.
3) Inventory valuation and profit determination methods are different between the two techniques.
INFORMATION ABOUT
B.E.P.
Definition
Cost Volume Profit analysis & Application
Assumption of BEP analysis
Calculation
Method
Formula
Target profit
Margin of safety
Definition
Formula
Limitation of B.E.P.
Basic equation of Marginal Costing
Uses Of CVP Analysis
Limitations Of CVP Analysis
Profit Volume (P/V) Ratio
Marginal costing
Determination Of Marginal Cost
Features of Marginal Costing
Based on the information provided, my advice to the management would be:
1. Do not close down department B immediately as it is contributing Rs. 2,000 towards fixed costs and profits even though it is showing a loss.
2. Close down department A immediately as it is showing a negative contribution, meaning it is increasing the total losses.
3. Retain departments B, C and D as they are contributing positively towards profits.
4. Review the product mix and costs regularly to ensure only profitable departments are retained for maximizing overall profits.
Here are the solutions to the numerical problems:
i) BEP in units = Total Fixed Cost / Contribution per unit
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)
= 1,50,000/Rs. 5
= 30,000 units
ii) BEP in amount = Total Fixed Cost / P/V Ratio
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)/Rs. 15
= 1,50,000/Rs. 5/Rs. 15
= Rs. 1,50,000
iii) P/V Ratio = Contribution/Sales
= (Selling Price - Variable Cost)/Selling
This document contains an analysis of costs, market forces, and competitors for PGMAX (2014-2015). It includes sections on cost concepts, cost functions, short-run and long-run costs, economies of scale, and cost-volume-profit analysis. Market and competitor analyses cover market size, share, trends, Porter's Five Forces model, and assessing strengths and weaknesses of competitors. Break-even analysis calculations are shown for a example company.
This document discusses cost-volume-profit (CVP) analysis and its applications in business decision making. It defines fixed and variable costs and explains how CVP analysis explores the relationship between costs, activity levels, and profits. A key aspect of CVP is calculating the break-even point, which is the sales volume where total revenue equals total costs, resulting in zero profit. The document also outlines assumptions of break-even analysis and how to calculate break-even points using equations or graphs. It provides examples of using CVP to determine profit levels at different volumes and to calculate sales needed to achieve a target profit.
This document discusses cost-volume-profit (CVP) analysis and cost curves. It begins by defining CVP analysis as a technique for studying the relationship between costs, volume, and profit. It then outlines the assumptions of CVP analysis and describes three techniques: contribution analysis, profit-volume ratio analysis, and break-even analysis. The document also discusses average cost (AC), total cost (TC), and marginal cost (MC) curves in both the short-run and long-run, explaining how they are related and their different shapes.
This document discusses cost volume profit (CVP) analysis, which measures the relationship between costs, revenue, activity levels, and profit. It defines fixed costs as those that do not vary with output, like rent, while variable costs vary with activity levels, like direct labor. The objectives of CVP analysis are to understand how prices, volume, variable costs per unit, fixed costs, and sales mix impact profit. It assumes constant prices, costs, fixed costs, and sales mix. CVP analysis can be used to determine the volume needed to break even or hit profit targets and how prices, costs, and volume impact profits.
This document discusses break even analysis. It defines financial break even point as the level of sales or revenue needed to cover all expenses and reach zero profit. It provides the formula to calculate break even point using total fixed costs and contribution margin per unit. An example is given of a company calculating its break even point in units and revenue. Key assumptions and uses of break even analysis are outlined, including planning, pricing strategy, and investment decisions. Graphical and cash break even analysis are also introduced.
Cost-volume-profit (CVP) analysis examines how changes in volume, costs, and prices affect profits. It is used for managerial decisions like pricing, order acceptance, product promotion, and feasibility analysis. CVP analysis uses techniques like contribution margin analysis and break-even analysis under assumptions like linear revenues and expenses. Questions address profit levels at different volumes, the volume where costs equal revenues, and the effects of cost/price changes on profits.
This document discusses cost analysis and various cost concepts. It begins by defining cost analysis and its importance in business decision making. It then outlines several types of costs including: opportunity cost, economic cost, accounting cost, private and social costs, incremental and sunk costs, direct and indirect costs, average, marginal and total costs. It also discusses cost-output relationships in the short-run and long-run, factors determining costs, and break-even analysis. The key purpose is to provide an overview of different cost concepts and cost-output relationships that are important for business analysis and decision making.
Break even analysis determines the point where total costs and total revenue are equal. There is no profit or loss at the break even point. It examines how profit changes with variations in variable costs, price, fixed costs, and quantity. The break even point indicates the production or sales volume where costs and revenues balance. It is calculated using contributions (revenue minus variable costs) and fixed costs. Graphs and algebraic formulas can be used to represent the break even point. The analysis makes assumptions like constant prices, equal production and sales volumes, and fixed or variable costs.
Break even analysis determines the point where total costs and total revenue are equal. It examines how profit changes with variations in variable costs, sales price, fixed costs, and quantity. The break even point indicates the level where costs and revenues are in balance and there is no net profit or loss. It is calculated using contributions (revenue minus variable costs) and fixed costs. Graphical and algebraic methods can be used to represent the break even point. The analysis makes assumptions like constant prices, equal production and sales volumes, and fixed costs that remain the same regardless of output.
The document discusses concepts related to marginal costing including:
1) The definition of marginal cost as the change in total cost from producing one additional unit of output.
2) Formulas used in marginal costing like marginal cost, contribution, profit volume ratio, and break-even point.
3) The advantages of using marginal costing and break-even analysis for managerial decision making regarding production levels and product profitability.
Marginal costing is an accounting technique that separates total costs into fixed and variable components. It only includes variable costs when determining the cost of producing an additional unit. This helps management compare costs between time periods and determine profitability. CVP (cost-volume-profit) analysis studies the relationships between selling price, costs, volume, and profits. It shows how costs and profits change with volume and can help with decision making, budgeting, and performance evaluation. While useful for short-term analysis, marginal costing has limitations such as difficulty separating fixed and variable costs.
unit 2 CVP analysis, Break-even point.pptxuday231983
The National Anti-profiteering Authority (NAA) in India has issued letters to 50 consumer goods companies and over-the-counter drug makers to check if they have passed on the benefits of reduced GST rates to consumers. NAA is questioning the pricing strategies of companies like Mankind Pharma, Johnson & Johnson, and Colgate-Palmolive. Cost-volume-profit (CVP) analysis is an important tool that provides information on the behavior of costs with changes in volume, break-even points, sensitivity of profits to output changes, and profits for projected sales levels. Break-even analysis determines the sales volume needed to cover total costs and is a key aspect of CVP analysis.
The cost of production/Chapter 7(pindyck)RAHUL SINHA
content
•MEASURING COST: WHICH COSTS MATTER?
•Fixed and variable cost
•Fixed versus sunk cost
•Amortizing Sunk Costs
•Marginal cost
•Average cost
•Determinants of short run cost
•Diminishing marginal returns
•The shapes of cost curves
•The Average–Marginal Relationship
•Costs in a long run
•Cost minimizing input choices
•Isocost lines
•Marginal rate of technical substitution
•Expansion path
•The Inflexibility of Short-Run Production
•Long run average cost
•Economies and Diseconomies of Scale
•The Relationship Between Short-Run and Long-Run Cost
•Break even analysis
This document provides an overview of cost-volume-profit (CVP) analysis. It defines key CVP terms like marginal cost, contribution margin, break-even point, and margin of safety. An example is provided to illustrate how to calculate break-even point using both the equation method and contribution margin method. The objectives, assumptions and limitations of CVP analysis are also discussed. CVP analysis determines how costs and sales volume affect profitability and is useful for decision making.
Marginal costing considers variable costs and treats fixed costs as period costs. It is used to calculate break-even point, contribution, and profit-volume ratio. Break-even point is the level of sales or production units where total contribution covers total fixed costs. Contribution per unit is sales price less variable cost per unit. Profit-volume ratio expresses the percentage of each sales rupee that contributes to profit. Marginal costing is useful for decision making, pricing, product mix optimization, and performance evaluation.
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3. CVP ANALYSIS
• The analytical technique that is used to
study the behavior of profit in response to
change in volume, cost and prices is
called CVP analysis.
4. • Cost-Volume-Profit Analysis (CVP), It is a
simplified model, useful for short-run decisions.
• A critical part of CVP analysis is the point where
total revenues equal total costs (both fixed and
variable costs).
• Cost-volume-profit analysis employs the same
basic assumptions as in breakeven analysis
5. Assumptions underlying CVP
analysis
• Cost segregation : the total cost can be
separated in to fixed and variable components.
• Constant unit variable cost : variable cost per
unit is constant and total variable cost change in
direct proportion to sales volume.
• Constant fixed cost : total fixed cost remains
unchanged with changes in sales volume.
6. • Constant selling price : the selling price per unit
remains constant that it does not change with
volume or because of other factors.
• Constant sales mix : the firm manufactures only
one product or if there are multiple products, the
sales mix does not change.
• Synchronized production and sales : inventory
level remains the same
7. The components of Cost-Volume-Profit
Analysis are:
• The volume or level of activity is the activity that causes changes in
the behaviour of cost. The changes should be correlated with
changes in cost
unit selling price is linked directly to profit and includes all costs and expenses
pertaining to production and sale of the product
Variable costs are corporate expenses that vary in direct proportion to the quantity
of output. Unlike fixed costs, which remain constant regardless of output, variable costs
are a direct function of production volume, rising whenever production expands
and falling whenever it contracts. Examples of common variable costs include
raw materials, packaging, and labour directly involved in a company's manufacturing
process.
8. • A cost that remains unchanged even with
variations in output is know as fixed cost.Yotal
fixed cost remains constant.
• sales mix
• Proportion of total sales which each product or
product line generates, and which needs to be
appropriately balanced to achieve the maximum
amount of gross profit.
9. Basic graph
• The assumptions of the CVP model yield the following linear equations for total costs
and total revenue (sales):
–
–
• These are linear because of the assumptions of constant costs and prices, and there
is no distinction between Units Produced and Units Sold, as these are assumed to be
equal. Note that when such a chart is drawn, the linear CVP model is assumed, often
implicitly.
• In symbols:
–
–
• where
• TC = Total Costs
• TFC = Total Fixed Costs
• V = Unit Variable Cost (Variable Cost per Unit)
• X = Number of Units
• TR = S = Total Revenue = Sales
• P = (Unit) Sales Price
• Profit is computed as TR-TC; it is a profit if positive, a loss if negative.
12. • total cost = fixed costs + unit variable cost
* amount
describes the total economic cost of production and is made up of variable costs,
which vary according to the quantity of a good produced and include inputs such
as labor and raw materials, plus fixed costs, which are independent of the quantity
of a good produced and include inputs (capital) that cannot be varied in the
short term, such as buildings and machinery
13. PROFIT ANALYSIS
• Profit is affected by change in
volume,cost,and prices. This is used to
reflect the effect of change in one or more
factors on profit.
• CVP analysis is used to reflect the effect
of changes in one or more factors on
profit.
14.
15. PROFIT VOLUME GRAPH
• The graph has 2 parts, separated by sales line.
• The upper part of the graph indicates profit.
• Fixed cost are marked on the lower part.
• The amount of fixed cost unrecovered is loss
• incurred
• Profit line is drawn by joining fixed cost point and
• sales line at the breakeven point.
16. EFFECT OF CHANGE ON PROFITS
• Profits may be effected by changes-
increase or decrease in the following
factors:
• Selling price
• Volume
• Variable cost
• Fixed cost
• A combination of all or any of the above 4
factors
17. The following data is analyzed to show effect of change in
various factors on profit
Budgeted sales
volume(100000@Rs 20)
20,00,000
Less budgeted variable
cost (100000@Rs 10)
10,00,000
Budgeted contribution 10,00,000
Less budgeted fixed
cost
4,00,000
Budgeted net profit 6,00,000
bep 8,00,000
p/v ratio 50%
18. • The selling price may change because of
economic factor or management itself may
initiate changes due to increase or
decrease in cost or competition or for
some other reason. Most cost are
controllable and are affected by volume
changes. The ultimate impact of changing
factors is on the firms profit.
19. EFFECT OF CHANGE IN PRICE
Change in
price
Decrease
(20%)
budget Increase(2
0%)
Units 100000 100000 100000
Selling
price
16 20 24
Variable
cost
10 10 10
Contributio
n
6 10 14
Fixed cost 1600000 2000000 2400000
22. • An increase in selling price will increase
the p/v ratio and as a result it reduces
break even point.
• On the contrary decrease in price will
reduce p/v ratio and increases break even
point.
23. EFFECT OF VOLUME CHANGES
Change in
volume
Decrease(2
0%)
budget Increase(2
0%)
Units 80000 100000 120000
Selling
price
20 20 20
Variable
cost
10 10 10
Contributio
n
10 10 10
sales 1600000 2000000 2400000
25. • A change in volume , not accompanied by
change in the selling price and/or cost, will
not affect p/v ratio.
• As a result the break even point remains
unchanged. Profit will increase with the
increase in volume and will be reduced
with a decrease in volume.
26. EFFECT OF PRICE AND VOLUME
CHANGES
Change in
price
Decrease
20%
Budget Increase
10%
Change in
volume
Increase
25%
budget Decrease
15%
Units 125000 100000 85000
Selling
price
16 20 22
Variable
cost
10 10 10
contribution 6 10 12
28. • A change in price is affected by volume. A
price reduction may increase demand of
the product and result in increase in
volume. Profits may increase with a
reduction in price and volume increases
substantially and price rise may reduce
profits if there is fall in volume.
29. EFFECT OF VARIABLE COST
CHANGES
Change in
variable
cost
Decrease
20%
budget Increase
20%
Units 100000 100000 100000
Selling
price
20 20 20
Variable
cost
8 10 12
Contributio
n
12 10 8
31. • p/v ratio 60%,50%,40%.
• An increase in variable cost will lower the
PE ratio , push up the break even point
and reduces profit. If the variable cost
decreases P/V ratio increases and break
even point will be lowered and profits will
rise.
32. EFFECT OF CHANGE IN FIXED
COSTS
Change in
fixed cost
Decrease
25%
budget Increase
25%
Units 100000 100000 100000
Selling
price
20 20 20
Variable
cost
10 10 10
Contributio
n
10 10 10
Sales cost 2000000 2000000 2000000
35. • P/V ratio : 50%,50%,50%
• A change in fixed cost does not influence
P/V ratio. Other factors remaining
unchanged ,a fall in fixed cost will lower
break even point and increases profit
• If total fixed cost is 152000 calculate BEP
and profit.
36. COST VOLUME PROFIT ANALYSIS FOR MULTI
PRODUCT FIRM
Product
x y z
Sales 200000 300000 500000
Variable
cost
120000 210000 350000
39. UTILITY OF CVP ANALYSIS
• It is simple device to understand
accounting data.
• It is a useful diagnostic tool.
• It provides basic information for further
profit improvement studies.
• It is useful method for considering risk
implementation of alternative actions.
40. LIMITATION OF CVP ANALYSIS
• It is difficult to separate cost in to fixed and
variable components.
• It is not correct to assume that total fixed cost
would remain unchanged over the entire range
of volume.
• The assumption of constant selling price and
variable cost is not valid.
• It is difficult to use break even analysis
41. • For multi product firm.
• The break even analysis is a short run
concept and has a limited use in long
range planning.
• The break even analysis is static tool.
42. • BEP analysis is a specific way of studying the
interrelationship between cost, volume and
profit.
• BEP analysis establishes relationship between
revenues, cost with respect to volume,
• The significant aspect of CVP analysis is to
examine the effects of change in cost, volume
and price on profits.
43. Break even chart
• This chart portrays a pictorial view of the
relationship between cost, volume, profit.
• The BEP indicated in the chart will be one
at which total cost line and total sales lines
intersects.
44. • Estimated sales : 20,00,000
• Less :Variable cost : 12,00,000
• Contribution : 8,00,000
• Less : Fixed cost : 4,00,000
• Net profit : 4,00,000
45.
46. • Intersection between sales and total cost
is the BEP.
• The angle formed by intersection of sales
and total cost line is known as angle of
incidence. Larger the angle lower will be
the BEP and vice versa.
• Margin of safety : the excess of actual or
budgeted sales over break even sales
47. • Margin of safety indicates the extent to which
sales may fall before the firm suffers a loss.
• A low margin of safety may result for a firm
which has low contribution.
• If both margin of safety and P/V ratio are low the
firm must think of increasing selling price
48. • Margin of safety = sales- BE sales/sales
• BE sales = fixed cost/contribution
49. Limitations
of break even analysis
• Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells
you nothing about what sales are actually likely to be for the product at
these various prices.
• It assumes that fixed costs (FC) are constant
• It assumes average variable costs are constant per unit of output, at least in
the range of likely quantities of sales. (i.e. linearity)
• It assumes that the quantity of goods produced is equal to the quantity of
goods sold (i.e., there is no change in the quantity of goods held in inventory
at the beginning of the period and the quantity of goods held in inventory at
the end of the period).
• In multi-product companies, it assumes that the relative proportions of each
product sold and produced are constant (i.e., the sales mix is constant).