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Transcript

MARGINAL COSTING

GROUP MEMBERS

A

vamshi - 18

karthik - 56

vivek -50

vasu -32

hari - 13

srikanth -59

praneth-60

Agenda

AGENDA

AGENDA

1)MEANING OF MARGINAL COSTING

2)DEFINATION OF MARGINAL COSTING

3)FEATURES OF MARGINAL COSTING

4)ADVANTAGES OF MARGINAL COSTING

5)LIMITATION OF MARGINAL COSTING

6)CVP MEANING,APPROCHES OF CVP

7)TYPES OF COST

8)PROFIT VOLUME RATION APPROACH

9)CONTRIBUTION MARGIN APPROACH

10)BREAK - EVEN ANALYSIS

11)MARGIN SAFETY APPROACH

12)USE OF CVP ANALYSIS IN BUSINESS

MARGINAL COSTING MEANING

C

DEFINATION OF MARGINAL COSTING

Marginal costing is a principle whereby

variable costs are charged to cost units

and the fixed costs attributable to the

relevant period is written off in full against

the contribution for that period.

Marginal costing is the ascertainment of

marginal cost and the effect on profit of

changes in volume or type of output by

differentiating between fixed costs and

variable cost. In marginal costing, costs

are classified into fixed and variable costs

DEFINATION OF MARGINAL COSTING

Marginal cost is the additional cost of producing an

additional unit of a product.

According to I.C.M.A. London as "the amount to any

given volume of output by which aggregate costs are

changed if the volume of output is increased or

decreased by one unit". In practice, this is measured by

the total variable cost attributable to one unit.

Thus, Marginal Cost= Prime cost+ Total variable

overheads

(or)

Total cost-Fixed cost.

IMPORTANCE OF MARGINAL COSTING

IMPORTANT OF MARGINAL COSTING

  • Ascertainment of Marginal (VARIABLE) cost
  • Effects on Profit with changes in the output.
  • Providing information to the management
  • assistance in decision making
  • VARIBALE' 'OUT OF POCKET' Costing
  • Analysis of cost into 'Variable' and 'Fixed cost'

FEATURES OF MARGINAL COSTING

B

1) Control or decision making

2) Classification

3) Fixed cost

4) Variable cost

s) Contribution

6) Profitability

7 Ascertain profit

8) Cost-volume-profit relationship

ADVANTEGES OF MARGINAL COSTING

ADVANTEGES

  • Simplicity
  • Stock valuation
  • Meaningful reporting
  • Effect of fixed costs
  • Profit planning
  • Cost control and cost reduction
  • Pricing Policy
  • Helpful to Management

LIMITATION

LIMITATIONS OF MARGINAL COST

  • Classification of cost
  • Not suitable for external reporting
  • Lack of Longterm perspecthve
  • Under valuation of stock
  • Automation
  • Production aspect is ignored
  • Not applicable in all types ofbustness
  • Misleading picture
  • Less scope for Long-termpolicy decision

TYPES OF COSTS

S

The effect of volume of activity on costs

  • Variable costs

Increase or decrease in total in direct proportion

to changes in the volume of activity

  • Fixed costs

Do not change over wide ranges of volume

  • Mixed costs

Have both variable and fixed components

VARIABLE COST

VARI

Total variable costs change in direct proportion

to changes in the volume of activity

  • If activity increases, so does the cost
  • Unit variable cost remains constant

Volume can be measured in many different

ways:

  • Number of units sold
  • Number of units produced
  • Number of miles driven by a delivery vehicle
  • Number of phone calls placed

Title

TOTAL VARIABLE COST

FIXED COST

Tend to remain the same in amount, regardless

of variations in level of activity

Examples:

  • Straight-line depreciation
  • Salaries

Total fixed costs do not change, but the fixed

cost per event depends on the number of events

  • The more activity, the less the fixed cost per unit

Second Action

TOTAL FIXED COST

Title

MIXED COST

Have both a fixed and variable component

Example:

  • Utilities that charge a set fee per month, plus a charge for usage
  • Your cell phone

provider

Third

Action

Title

COST-VOLUME ANALYSIS MEANING

N

It is a systematic method of examining the relationship

between selling price, sales revenue, volume of

production and profits.

CVP analysis is one of the most important tools of

decision making.

TYPES OF APPROACH

Timeline

1. CONTRIBUTION MARGIN APPROACH

2.PROFIT VOLUME RATIO

3 BREAK EVEN ANALYSIS

4. MARGIN OF SAFETY

CONTRIBUTION MARGIN APPROACH

CMA shows the excess of sales revenue over variable cost.

Example - suppose a firm is selling 100 units@ Rs. 20 per

unit. The variable cost for producing these units is Rs. 5

per unit and fixed cost incurred by the business is Rs. 1000.

Contribution = Sales revenue - variable cost

= (100x20) - (100x5)

= 2000- 500 =1500

Contribution fixed cost

Profit

= 1500-1000 = 500

Title

PROFIT VOLUME RATIO

When contribution margin is expressed in percentage

of sales is called P/V Ratio.

P/V Ratio= [Contribution /sales ] x 100

Example- Sales revenue of X Itd. Is Rs 50000, Variable

cost is Rs 35000 and fixed cost is Rs 10000. Find out

P/V ratio.

P/V ratio = [contribution/sales] x 100

= 15000/50000] x 100 = 30%

Title

BREAK-EVEN ANALYSIS

Break even point is no profit no loss point, where total

cost is equal to total sales.

Break Even Sales (in amount)

=Fixed cost/PV Ratio

Break Even Sales (in units)

= Fixed Cost/contribution per unit

Title

BREAK-EVEN EXAMPLE

Title

Sales price per unit = Rs 50

Variable cost per unit = Rs 30

Fixed cost = Rs 20000

Calculate break even point

Sol.

contribution = Rs 20 per unit (50-30)

= Rs 200000

Fixed cost

P/V ratio

= contribution/sales x 100

=20/50 x 100 = 40%

Break Even Point (in amount) = Fixed cost/PV ratio

20000/40 x 100 = 50000

Break Even Point (in units)

= Fixed cost/Contribution per unit

=20000/ 20 = 1000 units

Title

Title

MARGIN OF SAFETY

It is the difference between actual sales and break

even sales of a business.

Margin of Safety = Actual sales - Sales at BEP

OR

Margin of safety = Profit/PV ratio

Title

APPLICATION OF COST VOLUME PROFIT ANALYSIS IN BUSINESS

Cost volume profit analysis is a very important technique of

management accounting. It helps to solve many of the

managerial problems like :

  • Make or buy decisions.
  • Product planning decisions.
  • Product mix decisions.
  • Profit planning decisions.
  • Capacity planning decisions etc.

Title

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