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m arginal c osting

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marginalcosting

ACCOUNTING(FINANACIAL & COST) OF

ICMAP STAGE 1,2,3,4 (NEW CLASSES)

CA..MODULE B,C,D

PIPFA (FOUNDATION,INTERMEDIATE,FINAL)

ACCA-F1,F2,F3

BBA,MBA

B.COM(FRESH),M.COM

MA-ECONOMICS..O/A LEVELS

KHALID AZIZ…..0322-3385752

Why do we study Marginal Costing?

What do we study in Marginal Costing?

- Marginal Cost
- Marginal Costing
- Direct Costing
- Absorption Costing
- Contribution
- Profit Volume Analysis
- Limiting Factor/key factor
- Break Even Analysis
- Profit Volume Chart

What do we study in Marginal Costing?

and

Why do we Study MC?

- Marginal Cost
- Marginal Costing
- Direct Costing
- Absorption Costing
- Contribution
- Profit Volume Analysis
- Limiting Factor/key factor
- Break Even Analysis
- Profit Volume Chart

Management

Decision

Making

Marginal Cost

“Marginal cost is amount at any given

volume of out put by which aggregate

costs are changed…..

if volume of output

is increased or decreased by one unit”

Marginal Cost

“Marginal cost is amount at any given

volume of out put by which aggregate

costs are changed if volume of output

is increased or decreased by one unit”

1

Marginal Cost 100 x150= 15000

Fixed Cost = 5000

total 20000

2

1 Manufacture 100 radio

Variable costs Rs150 p u

Fixed cost Rs 5000

2 If Manufacture 101 radios

Marginal cost 150 x101=15150

Fixed Cost = 5000

TOTAL 20150

additional Cost=Rs 150

Marginal Costing

“marginal costing is ascertainment of

marginal cost by differentiating between

fixed and variable costs

and of the effect

of changes in volume or type of output”

Marginal Costing

What Could be effects of

Changes

In volume

or

Type of output

Marginal Costing

What Could be effects of

Changes

In volume

or

Type of output

1 lakh units

To

2 lakh units

Marginal Costing

From One

Model of

Car to

Another

What Could be effects of

Changes

In volume

or

Type of output

From One

Size of

product to

another

Marginal Costing ---Characteristics

Fixed & Variable

Costs

Inventory

Valuation

MC Costs as

Products Costs

Contribution

Marginal Costing

&

Profit

Fixed Costs as

Period Costs

Pricing

Marginal Costing ---Characteristics

Segregation

Fixed & Variable

Costs

Semi-variable costs

are segregated

into fixed &

variable

Marginal Costing ---Characteristics

Marginal Costs

as

Products Costs

Only Variable costs

are charged

to products

Marginal Costing ---Characteristics

Fixed Costs as

Period Costs

Fixed costs treated

Period costs

Charged to costing

P & L Account

Marginal Costing ---Characteristics

Inventory

Valuation

WIP & F goods are

Valued at

Marginal Cost

Marginal Costing ---Characteristics

Contribution

S-V=C

Profitability judged on

Contribution made

Marginal Costing ---Characteristics

Pricing

Pricing is based on

Contribution &

Marginal Costs

Marginal Costing ---Characteristics

Marginal Costing

&

Profit

A B C Total

Sales - - - ----

Less VC - - - ----

Contribution - - - ----

Fixed Cost ----

Profit -----

Marginal Costing ---

Marginal Costing Profit

Sales of A

Sales of B

Sales of C

less

less

less

Marginal cost

Of A

Marginal cost

Of B

Marginal cost

Of C

=

=

=

Contribution of

A

Contribution of

B

Contribution of

C

Total

Contribution of

A,B& C

less

Profit/loss

Total Fixed

Cost

=

Absorption Costing

“Absorption cost is a total cost technique

Under which total cost i.e. fixed & variable

is charged to production.

Inventory is also valued at total cost.

Absorption-Marginal Costing--differences

Measurement

Of

Profitability

Valuation

Of stock

Fixed &

Variable

Costs

Absorption-Marginal Costing--differences

Fixed &

Variable

Costs

Absorption Costing

Both F & V Costs

Are charged

Marginal Costing

Only variable cost

FC charged to P/L

Absorption-Marginal Costing--differences

Valuation

Of stock

WIP & FS

at

Marginal

Cost

Total Cost

Absorption-Marginal Costing--differences

Measurement

Of

Profitability

C=S-V

P=S-V-F

Comparative Cost Statement

- Marginal Costing
- Months
- 2 3 Total
- Rs Rs Rs Rs

- Absorption Costing
- Months
- 2 3 Total
- Rs Rs Rs Rs

(A) Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000

Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625

Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000

F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000

Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625

Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625

(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000

Contribution (A-B)c80,000 66,000 94,000 2,40,000 _ _ _ _

( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1,35,000

(A-B)

45,000 37,125 52,875 1,35000

Comparative Cost Statement

- Marginal Costing
- Months
- 2 3 Total
- Rs Rs Rs Rs

- Absorption Costing
- Months
- 2 3 Total
- Rs Rs Rs Rs

(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000

Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625

Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000

F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000

Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625

Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625

(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000

Contribution (A-B)c80,000 66,000 94,000 2,40,000 _ _ _ _

( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1,35,000

(A-B)

45,000 37,125 52,875 1,35000

Comparative Cost Statement

- Marginal Costing
- Months
- 2 3 Total
- Rs Rs Rs Rs

- Absorption Costing
- Months
- 2 3 Total
- Rs Rs Rs Rs

(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000

Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625

Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000

F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000

Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625

Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625

(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000

Contribution (A-B)c80,000 66,000 94,000 2,40,000 _ _ _ _

( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _

Profit (C-D) 45,000 31,000 59,000 1,35,000

(A-B)

45,000 37,125 52,875 1,35000

Concept Of Contribution

Contribution is the difference between sales

And the marginal (Variable) cost

Contribution =sales-variable cost

C= S-V

Contribution = Fixed Cost+ Profit

C= F+P

Therefore

S-V = F+P

Contribution is the difference between sales

And the marginal (Variable) cost

S-V=F+P

If any 3 factors in the equation are known

The 4th could be found out

P=S-V-F

P=C-F

F=C-P

S=F+P+V

V=S-C……….

PROFIT ?

SALES?

Sales =Rs 12,000

V Cost=RS 7,000

F Cost=Rs 4,000

C=S-V

=12,000-7000=5000

P=C-F

=5,000-4000

=Rs 1,000

S=C+V

=5,000+7,000

=Rs 12,000

F COST?

V Cost?

Sales =Rs 12,000

V Cost=RS 7,000

F Cost=Rs 4,000

F=C-P

=5,000-1,000

=Rs 4,000

V=S-C

=12,000-5000

=Rs 7,000

Profit –Volume Ratio (PV Ratio)

(Expresses the relation of Contribution to sales)

Sales= Rs 10,000

V Cost=Rs 8,000

P/V Ratio =Contribution = C/S =S-V/S

Sales

C = S XP/V Ratio

C

S = --------

P/V Ratio

P/V Ratio=c/s

=S-V/S

=10,000-8000/10,000

=20%

Profit –Volume Ratio (PV Ratio)

When PV

Ratio is

Given

C= SXPV Ratio

C= 10000X20%

=Rs 20,000

Profit –Volume Ratio (PV Ratio)

Another Method

Change in Contribution

P/V Ratio = ---------------------------------

Change in Sales

Change in profit

= -----------------------

Change in Sales

1600-1000

=-------------------x 100

22000-20000

600

= -----------x100=30%

2,0000

- Year sales net profit
- 20,000 1000
- 22,000 1600

What Could be the Uses of PV Ratio?

- Break Even Point
- Profit at Given Sales
- Vol required to earn givenProfit

How Improvement in PV Ratio Could be Achieved?

- Increasing Selling Price
- Reducing Variable Cost
- Changing Sales Mix

Limiting Or Key Factor

a factor in short supply

Limiting Or Key Factor

a factor in the activities of an undertaking

which at a point of time or over a period

will limit the volume of out put

Limiting Or Key Factor

What Could be the Limiting Factors ?

Labour

Materials

Power

Sales

Capacity

Machines

………….

Cost- Volume- Profit Analysis

Cost- Volume- Profit Analysis

- Cost Of Production
- Selling Prices
- Volume Produced /Sold

Cost- Volume- Profit Analysis

- Break Even Analysis
- Profit Volume Chart

Cost- Volume- Profit Analysis

- Break Even Analysis

A point of no profit no loss

A point where revenue equals cost

What are BEP---assumptions

- All costs are fixed or variable
- VC remains Constant
- Total FC remains Constant
- Selling Price don’t change With Volume
- Synchronisation of Prod & Sales
- No Change in Productivity per workers

Cost- Volume- Profit Analysis

- Break Even Analysis

Methods

Algebraic Method

Graphic Method

Cost- Volume- Profit Analysis

ALGEBRAIC

METHOD

Fixed Cost

BEP (Units) = --------------- = F

Contribution PU S-V

Fixed Cost

BEP (Rs ) = ----------------- x Sales

Contribution

Fixed Cost

BEP (Rs) = ------------------

P/V Ratio

Cost- Volume- Profit Analysis

ALGEBRAIC

METHOD

Fixed Cost

BEP (Units) = --------------- = F

Contribution PU S-V

Fixed Cost

BEP (Rs ) = ----------------- x Sales

Contribution

Fixed Cost

BEP (Rs) = ------------------

P/V Ratio

F Cost=Rs 12000

S Price=Rs12 pu

V Cost =Rs 9 pu

Find BEP

Cost- Volume- Profit Analysis

- F Cost=Rs 12000
- S Price=Rs12 pu
- V Cost =Rs 9 pu
- Profit when sales are
- Rs 60,000
- Rs 1,00,000

Other Uses

Profit at diff. Sales Vol.

Sales at Desired Profit

Cost- Volume- Profit Analysis

- F Cost=Rs 12000
- S Price=Rs12 pu
- V Cost =Rs 9 pu
- Profit when sales are
- Rs 60,000
- Rs 1,00,000

Profit at diff. Sales Vol.

C

P/V Ratio= ----- = 3/12=25%

S

WHEN SALES=Rs 60,000

contribution=salesxp/vratio

=60000x25%

=Rs 15000

Profit =contribution-fixed cost

=15000-12000

=Rs3000

Cost- Volume- Profit Analysis

- F Cost=Rs 12000
- S Price=Rs12 pu
- V Cost =Rs 9 pu
- Sales if desired profit
- Rs 6000
- Rs 15,000

Other Uses

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------

P/V Ratio

Cost- Volume- Profit Analysis

- F Cost=Rs 12000
- S Price=Rs12 pu
- V Cost =Rs 9 pu
- Sales if desired profit
- Rs 6000
- Rs 15,000

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------

P/V Ratio

12,000+6000

a)Sales= ---------------

25%

=Rs 72,000

CVP Analysis -question

P ltd has earned a profit of Rs 1.80 lakh on sales of

Rs 30 lakhs and V Cost of Rs 21 lakhs.

work out

a)BEP

b)BEP When V Cost decreases by5%

c)BEP at present level when selling price reduced by5%

CVP Analysis -

S-V

P/V Ratio=--------

S

3000000-2100000

= ------------------------

3000000

=30%

Sales =VC+FC+P

3000000=2100000+FC+180000

FC =Rs 720000

7,20,000

BEP= -------------

30%

=Rs 2400000

CVP Analysis -question

b) When V Cost increases by 5%

New Variable Cost=2100000+5%

=22,05,000

PV Ratio 3000000-2205000

3000000

=26.5%

BEP =7,20,000/ 26.5%

=Rs 27,16,981

CVP Analysis -question

c)When Selling Price reduced by 5%

New SP=3000000—5%

=Rs 28,50,000

Contribution=28,50,000-21,00,000

=Rs7,50,000

PV Ratio =7500000/2850000

=26.32%

FC+PROFIT

Desired Sales= ------------------ = 720000+1800000

PV Ratio 26.32%

=Rs 34,19,453( appx)

BEP

Graphical Presentation

Costs/Revenue

Initially a firm will incur fixed costs, these do not depend on output or sales.

FC

Q1

Output/Sales

The Break-even point occurs where total revenue equals total costs – the firm, in this example would have to sell Q1 to generate sufficient revenue to cover its costs.

Total revenue is determined by the price charged and the quantity sold – again this will be determined by expected forecast sales initially.

The lower the price, the less steep the total revenue curve.

As output is generated, the firm will incur variable costs – these vary directly with the amount produced

The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC

Initially a firm will incur fixed costs, these do not depend on output or sales.

Costs/Revenue

TR

TR

TC

VC

FC

Q1

Output/Sales

Break-Even Analysis

Costs/Revenue

If the firm chose to set price higher than Rs2 (say Rs3) the TR curve would be steeper – they would not have to sell as many units to break even

TC

TR

TR

VC

FC

Q2

Q1

Output/Sales

Break-Even Analysis

TR)

Costs/Revenue

If the firm chose to set prices lower it would need to sell more units before covering its costs

TR

TC

VC

FC

Q1

Q3

Output/Sales

Break-Even Analysis

TR

TC

Costs/Revenue

VC

Profit

Loss

FC

Q1

Output/Sales

Break-Even Analysis

Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made

TR

TC

TR

Costs/Revenue

A higher price would lower the break even point and the margin of safety would widen

VC

Assume current sales at Q2

Margin of Safety

FC

Q1

Q3

Q2

Output/Sales

High initial FC. Interest on debt rises each year – FC rise therefore

Costs/Revenue

FC 1

FC

Losses get bigger!

TR

VC

Output/Sales

Remember:

A higher price or lower price does not mean that break even will neverbe reached!

The BE point depends on the sales needed to generate revenue to cover costs

Importance of Price Elasticity of Demand:

Higher prices might mean fewer sales to break-even

Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even

Links of BE to pricing strategies and elasticity

Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even

Links of BE to pricing strategies and elasticity

Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even

Links of BE to pricing strategies and elasticity

Elasticity – what is likely to happen to sales when prices are increased or decreased?

Marginal Costing

Cost Volume Chart

Construction Of PV Chart

1 select a scale on Horizontal axis---sales

2 Select a scale on Vertical axis- FC & Profit

3 Plot FC & Profit

4 Diagonal line crosses sales line at BEP

PV Chart Information

Fixed Cost =Rs 5000

Sales =Rs 20000(pu RS 20)

V Cost= Rs 10000(pu Rs10)

Find

PV Ratio, BEP, Profit?

Construction Of PV Chart

8000

6000

5000

4000

2000

BEP

Fixed Cost

Rs

Profit

Rs

0 5000 10000 15000 20000

Sales Rs

2000

4000

5000

6000

8000

Construction Of PV Chart

8000

6000

5000

4000

2000

BEP

Profit

Area

Fixed Cost

Rs

Profit

Rs

0 5000 10000 15000 20000

Sales Rs

Loss

Area

2000

4000

5000

6000

8000

Margin of Safety

--------------------------

Effect Of Change in Profit- 20% decrease in fixed Cost

New F Cost= 5000- 20%=Rs4000

Fixed Cost

New BEP = PV Ratio

= 4000/50%

=Rs 8000

New Profit=S-F-V

=20000-4000-10000

=Rs 6000

Effect of Change in profit- 20% decrease in FC

8000

6000

5000

4000

2000

BEP

Profit

Area

Fixed Cost

Rs

Profit

Rs

0 5000 10000 15000 20000

Sales Rs

Loss

Area

2000

4000

5000

6000

8000

Effect Of Change in Profit- 10% decrease in V Cost

New V Cost= 10000- 10%=Rs9000

New PV Ratio=20000-9000

20000

Fixed Cost

New BEP = PV Ratio

= 5000/55%

=Rs 9090 Appx

New Profit=S-F-V

=20000-5000-9000

=Rs 6000

=55%

Construction Of PV Chart

8000

6000

5000

4000

2000

New BEP

Profit

Area

Fixed Cost

Rs

Profit

Rs

0 5000 10000 15000 20000

Sales Rs

Loss

Area

2000

4000

5000

6000

8000

Effect Of 5% Decrease in Selling Price

8000

6000

5000

4000

2000

Profit

Area

Fixed Cost

Rs

Profit

Rs

0 5000 10000 15000 20000

Sales Rs

Loss

Area

2000

4000

5000

6000

8000

New BEP

ACCOUNTING(FINANACIAL & COST) OF

ICMAP STAGE 1,2,3,4 (NEW CLASSES)

CA..MODULE B,C,D

PIPFA (FOUNDATION,INTERMEDIATE,FINAL)

ACCA-F1,F2,F3

BBA,MBA

B.COM(FRESH),M.COM

MA-ECONOMICS..O/A LEVELS

KHALID AZIZ…..0322-3385752