Marginal costing involves differentiating between fixed and variable costs to determine the marginal costs and the effect on profit of changes in output volume and type. An operating statement shows sales, marginal costs subtracted to get contribution, and fixed costs subtracted from contribution to get profit. Basic concepts include defining profit, contribution, profit volume ratio, break-even point, and margin of safety in determining production and pricing decisions.

1. Marginal costing

2.  Marginal cost is defined as the amount at any
given volume of output by which the
aggregate costs are changed if the volume of
output is increased or decreased by one unit.
 Marginal costing is defined as the
ascertainment, by differentiating between
fixed and variable costs, of the marginal costs
and of the effect on profit of changes in
volume and type of output.

3. Operating Statement
Sales XXX
Less: marginal cost
Direct material cost XXX
direct labour cost XXX
Direct expenses XXX
Variable overheads XXX XXX
contribution XXX
Less Fixed cost XXX
Profit XXX
Rs

4. Basic concepts
 Profit = Sales – Total cost
 Profit = Sales – (FC + VC)
 Profit + FC = sales - VC
 = contribution
 Contribution – fixed cost = profit

5.  Profit volume (P/V) ratio:
 This ratio indicates the contribution earned with
respect to one rupee of sales.
 =(contribution/sales)* 100
 =(change in profit/change in
sales) *100
 Sales * P/V ratio= contribution
 P/V ratio remains constant at all levels of
activities, provided per unit sales price and VC
remains constant.

6.  Break even point
 Contribution is just enough to cover the fixed cost
 BEP (Quantity) = fixed cost / contribution per
unit
 BEP ( Amount) = fixed cost / PV ratio

7.  A garment manufacturing firm has incurred a fixed
cost of Rs.2,30,000. It sells each unit for Rs.400.
The variable cost per unit is Rs.65. What will be the
break-even quantity and revenue?
Solution:
Q = 2,30,000/400-65
= 2,30,000/335
= 686.567 units or 687 units
Total Revenue = 687*400
= Rs.2,74,800
Q = Fixed cost / (Sales-VC)

8.  Margin of safety
 MoS = Sales – Break even sales
 = sales – ( fixed cost / PV ratio)
 = profit / PV ratio

9. Application of marginal costing
A B C
sales 100000 150000 250000
Total Cost
Variable Cost 90000 100000 150000
Fixed cost 20000 30000 50000
Total cost 110000 130000 200000
Profit (loss) (10,000) 20000 50000
products
As product A is incurring the losses, it is decided to close down its production.
Advise the management.
Value in Rs.
Evaluation of performance

10. Profit planning
 A company produces and sells socks. Due to competition, the
company proposes to reduce the selling price. If the present
level of profit is to be maintained, indicate the number of units
to be sold if the proposed reduction in price is (a) 10% and (b)
15%.
Rs Rs
Present sales (30000 units) 600000
Variabale cost (30000 units) 360000
Fixed cost 140000
500000
Net profit 100000

11. Fixation of selling price
 The plant capacity is 100000 units. A customer from
US is desirous of buying 20000 units at a price of Rs
10 / unit. Advice the company whether or not offer
should be accepted?
Rs
sales (80000 units@ Rs 15) 1200000
costs - Variable
material 240000
labour 320000
overheads 160000
720000
Fixed 320000
total Costs 1040000
profit 160000

12. Make or buy decision
 The management is facing a problem to
decide whether a component should be
manufactured in house or purchased from
outside. Can you help from following data?
component A Component B
Rs. /unit Rs. /unit
If manufactured
Variable Cost 30 30
Fixed Cost 25 20
If purchased 40 25

13. Optimizing product mix
Some info from the cost records of the company about products X
and Y
Direct material per unit --- X – Rs 8 , Y – Rs 6
Direct wages
X 24 hrs @ 25 paise per hr
Y 16 hrs @ 25 paise per hr
Variable overheads 150% of wages
Fixed overheads Rs 750
Selling price X-- Rs 25 and Y – Rs 20
The director wants to decide among the following to maximize
profit.
1. 250 units of X and 250 Units of Y
2. 400 units of Y only
3. 400 units of X and 100 units of Y
4. 150 units of X and 350 units of Y

14. Solve….
 Profit and sales for the year 2010 are Rs
18000 and Rs 240000 resp. In 2011 the
sales increased by Rs 40000 and the
profit increased by Rs. 8000. Calculate
 P/V ratio
 Sales required to achieve a profit of Rs
100000
 Sales at Break even point

15.  Calculate
 BEP in terms of sales amount
 No of units that must be sold to earn a profit of Rs.
60000 per yr
Rs
sales price (per unit) 20
variable cost per unit 11
variable selling cost (per unit) 3
fixed factory overheads (per yr) 540000
fixed selling cost per yr 252000

16.  During the current year XYZ ltd showed a
profit of Rs. 180000 on a sale of Rs. 3000000.
the variable expenses were Rs. 2100000. find
out
 The break even sales
 at present level
 If VC is increase by 5%
 To maintain profit as at present, if the selling price
is reduced by 5%.

17.  A company manufactures and markets a single product. Following data is
available:
 Rs Per unit
 Material 16
 Variable 12
 Dealers margin 4
 Selling price 40
 Fixed cost Rs 500000
 Present sales 90000 units
 Capacity Utilisation 60%
 There is acute competition. Extra efforts are necessary to sell. Suggestions have
been made for increasing sales
 1) by reducing sales price by 5%
 2) by increasing dealers margin by 25% over the existing rate.
Advice the company.

18.  A company operating at 75% level of activity produces and
selld two products X and Y. The cost sheet of these two
products are as under
 product X Product Y
 Units produced and sold 3000 2000
 Selling price per unit 115 95
 Direct material 10 20
 Direct labour 20 20
 Factory o/h(40% fixed) 25 15
 Admin o/h (60% fixed) 40 25
 Total cost per unit 95 80

19.  Factory overheads are absorbed on the basis of
machine hour rate which is the limiting factor. The
machine hour rate is Rs 10 Per hour.
 A company receives a offer from Japan for the
purchase of product X at a price of Rs. 87.50 per
unit. Alternatively, the company has another offer
from Bangkok for the purchase of Product Y at a
price of Rs 77.50 per unit. In both the cases, a
special packing charge of Rs 2.50 is included which
has to be borne by company. The company can
accept either of the two exports orders by utilising
the balance capacity
 Advice the company. Calculate the final profit
statement.

20.  A small tool factory has a plant capacity adequate to provide
19800 hrs of machine use. The plant can produce type A, Type
B or mixture of two. The following info is relevant:
 A B
 Selling price Rs 10 15
 Variable cost 8 12
 Hrs reqd to produce 3 4
 Market conditions are such that no more than 4000 A type and
3000 B type tools can be sold in a year. Annual fixed cost is Rs
9900
 Compute the product mix that will maximise the profit.

21. Homework…
 The summarized income statement of Manmohan Ltd is as follows:
 Net income 800000
 Less expenses 880000
(including Rs. 400000 fixed)
net loss 80000
At what sales volume will the company breakeven?
The manager believes that an increase of Rs. 200000 in advertising
outlays will increase sales substantially. His plan was approved by the
chairman of the board. You have to find out-
What additional sales will be required to offset the increase in advertising
outlays?
What sales volume will result in net profit of Rs. 40000?

22.  Solve 20 more problems on Marginal
costing.