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

1. MARGINAL COSTING
BY
PROF. SUKU THOMAS SAMUEL
DEPARTMENT OF MANAGEMENT

2. METHODS OF COSTING
Costing is the technique and process of ascertaining costs.
• Used for the ascertainment of cost of production.
• Important for estimation of production.
• Essential for fixing the price of the product.
• Needed for deciding the profit margin.
• Depends on the manufacturing process and nature of the
industry.

3. METHODS OF COSTING
Some of the methods of costing are as follows:
1. Historical Costing: determination of cost post occurrence of
activities based on the cost incurred.
2. Standard Costing: determination of cost based on the set
industry standards.
3. Absorption Costing: total fixed cost and variable cost are
absorbed to the products or services.
4. Marginal Costing: where only variable cost or direct cost will
be charged to the cost units

4. TYPES OF COST
Important types of cost associated with manufacture:
FIXED COST
• Cost that remains the same
• Does not change with the level of production
Example: rent, interest on loan etc.
VARIABLE COST
• Changes with the level of production
• Higher level of production, lower are variable cost. (scale of
economies)
Example: raw material, wages etc.

5. ABSORPTION COSTING
Absorption costing is a managerial accounting method for
capturing all costs associated with manufacturing a particular
product.
• It is also called as full absorption costing.
• Direct and indirect costs are accounted.
• All the cost involved are considered for product costing.
• Allocates fixed overhead costs to a product.

6. MARGINAL COSTING
Marginal costing is “the ascertainment of marginal costs and of
the effect on profit of changes in volume or type of output by
differentiating between fixed costs and variable costs.”
• Marginal Costing is also known as Variable Costing or
Differential Costing.
• Variable Cost are charged to cost units.
• Fixed Cost are written off against contribution.
• Contribution is a special value computed for decision making.

7. MARGINAL COSTING – FEATURES
The features of Marginal Costing are:
• Combines the techniques of cost recording and cost reporting.
• Segregated of total cost into fixed and variable cost.
• Fundamental principle whereby variable costs are charged to
cost units.
• Price of product/ service determined based on variable price.
• Fixed cost are recovered from profit.

8. BASIS MARGINAL COSTING ABSORPTION COSTING
Meaning
A decision making technique for
ascertaining the total cost of
production is known as Marginal
Costing.
Apportionment of total costs to the cost
center in order to determine the total cost of
production is known as Absorption Costing.
Cost
Recognition
The variable cost is considered as
product cost while fixed cost is
considered as period costs.
Both fixed and variable cost is considered as
product cost.
Classificatio
n of
Overheads Fixed and Variable
Production, Administration and Selling &
Distribution
Profitability
Profitability is measured by Profit
Volume Ratio.
Due to the inclusion of fixed cost, profitability
gets affected.
Cost per
unit
Variances in the opening and closing
stock does not influence the cost per
unit of output.
Variances in the opening and closing stock
affects the cost per unit.
Highlights Contribution per unit Net Profit per unit
Presented to outline total contribution
Difference – Marginal & Absorption Costing

9. MARGINAL COSTING – ADVANTAGES
The Advantages of Marginal Costing are:
• Overcoming difficulty of allocation and absorbing the
overheads.
• No requirements of classification into production and service
cost centers.
• Helps to establish the relationship between production and
variable costs.
• Helps in taking ‘make or buy’ decisions.
• Helps in strategizing for profit maximization.
• More accurate method of costing.
• Price benefit is passed onto the end consumer.

10. MARGINAL COSTING – LIMITATIONS
The limitations of Marginal Costing are:
• Segregation of cost into fixed and variable may be difficult.
• Danger of encouraging short sightedness about profit planning.
• Misinterpretation of investments with capital expenditure.
• Application difficulty in industries with high inventory levels.

11. MARGINAL COSTING EQUATION
Marginal Costing Equation explains the relationship between
Sales, Costs and profit.
S: Sales | V: Variable cost | F: Fixed Cost | P: Profit | C:
Contribution
F + P = C
Or
S - V = C
S - V = F + P

12. MARGINAL COSTING EQUATION
CONTRIBUTION:
• A pool of amount from which total fixed costs will be deducted
to arrive at the profit or loss.
• Includes fixed cost and profit.
• Contribution concept is used in managerial decision making.

13. PROFIT VOLUME RATIO
• In brief, referred to as P/V ratio.
• Also known as contribution ratio or marginal ratio.
• Explains the relationship between contribution and sales.
• Measurement of the rate of change of profit due to change in
volume of sales.
P/V Ratio =
Contribution
Sales
| Or | P/V Ratio =
S −V
Sales
Or
P/V Ratio =
F+P
Sales
Or P/V Ratio =
Change in profit
Changes in sales

14. BREAK EVEN POINT
Break Even Point in short is referred to as BEP.
• Refers to the revenue level necessary to cover a company's total
amount of fixed and variable expenses.
• It is with respect to an activity or during a specified period.
• BEP level corresponds to sales volume of neither profit nor loss.
• BEP can be estimated by applying:
i. Algebraic method
ii. Graphic representation

15. BREAK EVEN POINT
Algebraic method of calculation:
BEP =
Total Fixed cost
Contribution per unit
OR
BEP =
Total Fixed cost
PV Ratio

16. MARGIN OF SAFETY
• Margin of safety is a financial ratio.
• Measures sales that exceeds the break-even point.
• Revenue earned after meeting the fixed and variable costs.
• Helps in managerial decisions.
• Evaluation of impact of lost sales or increased costs the
company can absorb.
Margin of Safety = Actual sales – Break Even Sales
Margin of Safety = Profit / PV Ratio
Margin of Safety = Profit / Contribution per unit

17. COST VOLUME ANALYSIS
• Logical extension of Marginal Costing.
• Used of business decision makers.
The study of the effects on future profit of changes in fixed
cost, variable cost, sales price, quantity and mix.
• Helps management in finding out the relationship of costs
and revenues to profit.

18. CVP – OBJECTIVES
The objectives of CVP analysis are:
• Helpful for forecasting, long-term planning, growth and
stability.
• Helps in the analysis of economies of scale, capacity utilization.
• Provides detailed and clearly understandable information.
• Evaluate the effect of changes in fixed and variable costs at
different levels of production.

19. NUMERICAL
Question:
Given the total fixed cost is Rs 1,50,000; Selling price per unit Rs
15; Variable cost per unit Rs 10
Calculate:
i. Break Even point in units and amount
ii. P/V ratio

20. NUMERICAL
ABC Ltd furnished the following details about product X:
Selling price – Rs 100; Variable cost – Rs 50; Total fixed cost – Rs
1,00,000
Calculate:
i. BEP
ii. P/V Ratio
iii. Sales required for a profit of Rs 50,000
iv. New BEP if selling price is reduced by 10%

21. NUMERICAL
Question:
ABC Company Ltd, Rs 80,000 is the fixed cost. Variable cost is Rs
20/ unit and the selling price is Rs 40/ unit.
Calculate the
i. BEP in units
ii. BEP in amount
iii. PV ratio
iv. Sales when profit is Rs 20,000
v. Sales when profit is Rs 30,000

22. NUMERICAL
Question:
Given the following details about ABC company:
– Fixed cost Rs 1,00,000
– Variable cost Rs 10/ unit
– Selling price Rs 15/unit
Calculate the following details:
i. Number of units to be sold to break even.
ii. Sales earn a profit of Rs 10,000
iii. Sales earn a profit of Rs 15,000

23. NUMERICAL
Questions:
– Selling price per unit is Rs 25
– Variable cost includes manufacturing cost of Rs 12/unit and
selling price of Rs 3/unit.
– Fixed cost comprises of Rs 1,00,000 and selling price of Rs
50,000.
Calculate the breakeven sales and sales needed to earn Rs 50,000
as the profit.

24. NUMERICAL
Questions:
From the following information, calculate the
i. Contribution
ii. PV ratio
iii. BEP in unit and rupees.
iv. What is the selling price if the BEP is brought down to 25,000
units?
Fixed cost: Rs 25,000
Variable cost/ unit: Rs 10
Selling/ unit: Rs 15

25. NUMERICAL
Assuming the cost
structure and selling
price remains the
same in period,
calculate:
i. PV ratio
ii. Fixed cost
iii. BEP for sales
iv. Profit when sales
is Rs 1,00,000
v. Sales required to
earn a profit of Rs
20,000
vi. Margin of safety at
a profit of Rs
15,000
Period Sales Profit
I 1,20,000 9,000
II 1,40,000 13,000