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Cost-Volume-Profit Relationship   ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
 
 
What is Marginal Cost?   ,[object Object],[object Object]
Characteristics of Marginal costing  ,[object Object],[object Object],[object Object],[object Object]
llustration   ,[object Object],2,90,000 =  Total Cost 2,50,000 +(200 × 200) =   Rs. 2,50,000     = Fixed Cost Rs. 200/- unit.     = Variable Cost    200    = No. of units produced
[object Object],Rs. 200/-      =      290200-290000 =  Marginal Cost 290200 =    40200+ 250000 =  Therefore, the total cost
 
 
Break Even Analysis
Traditional Break Even Chart
Contribution Break Even chart
Mathematical representation of BEP   ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Illustration   ,[object Object],[object Object],[object Object],[object Object],[object Object]

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Cost volume-profit relationship

Editor's Notes

  1. In the cost volume profit analysis the relationship between costs and volume of sales is assumed to be linear. Fixed cost remains fixed irrespective of the volume and variable cost depends directly on the volume, which forms a straight line equation.
  2. Marginal cost represents the variable cost that depends on the production level of the company. Marginal costs relate to a change in output in the particular circumstances under consideration. It is the increase or decrease in total cost which results from producing or selling additional or fewer units of a product or from a change in the method of production or distribution such as the use of improved machinery addition or exclusion of a product or territory or selection of an additional sales channel. Marginal costing deals in the relationship between variable cost and production level and the impact on profit and loss. It is a technique of ascertaining marginal cost and of the effect on profit of changes in volume of out put by differentiating between fixed and variable costs. This costing technique can be incorporated into the accounting system. Marginal cost can be easily ascertained by adding variable overheads to prime cost.
  3. Managements use different mathematical tools to analyze how to get the maximum profit. Linear programming method can be used for ascertaining the optimum profit. Linear programming has been used in many situations that require thousands of decision variables and numerous constraints. Main drawback of this model is that very few characteristics of this model are being met in the practical world. Marginal costing does not consider fixed cost. Otherwise a problem may arise for allocating fixed cost for a particular period.
  4. B.E. analysis is used in both restricted and broad sense. In a broad sense B.E. analysis means an enquiry about inter-dependence among cost, volume of sales and profit at different levels of production. In a restricted sense we can measure the level of production and sales using this technique where the total of fixed and variable costs equal sales. It can be ascertained arithmetically or graphically. Arithmetically, it is called break even analysis and graphically, it is termed as break even chart. B.E. graphical method is applied by showing fixed cost along with total cost (traditional method) or comparing sales with contribution (contribution break even chart). Similarly mathematical B.E. method is applied by using P.V. ratio approach i.e. Fixed Cost/P.V. ratio or by using the following equation- NP=Px – (a +bx) Where, Np= net profit   X= units sold   P= selling price   b= unit variable cost   a= total fixed costs At the point of B.E.P. NP sets at 0
  5. In the given graph, the sales line and variable line starts from the ‘0’ point indicating variable cost is dependent on the sales. Fixed cost line is parallel to the horizontal axis denoting its fixed nature irrespective of the amount of production. Total cost line has been derived after adding variable cost line with the fixed cost. The point at which the sales line intersects the total cost line represents the B.E. Point. Area between total cost line and sales line is situated to the right side of the B.E.P. This denotes profit. Left side area of B.E.P. denotes loss. Right side area of the B.E.P. denotes the margin of safety i.e. sales over the B.E.P. and the angle between sales line and total cost line is known as angle of incidence.
  6. In the above graph, both the contribution line and sales line originate from the origin and the intersection point of the fixed cost and sales line is known as B.E.P. Production at this point represents the level of activity at which contribution is equal to fixed cost and there is no profit or loss. If the contribution exceeds the fixed cost line, it represents the profit position and vice versa.