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GROUP MEMBERS
vamshi - 18
karthik - 56
vivek -50
vasu -32
hari - 13
srikanth -59
praneth-60
Agenda
AGENDA
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.
IMPORTANT OF MARGINAL COSTING
FEATURES OF MARGINAL COSTING
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
LIMITATIONS OF MARGINAL COST
The effect of volume of activity on costs
Increase or decrease in total in direct proportion
to changes in the volume of activity
Do not change over wide ranges of volume
Have both variable and fixed components
Total variable costs change in direct proportion
to changes in the volume of activity
Volume can be measured in many different
ways:
TOTAL VARIABLE COST
Tend to remain the same in amount, regardless
of variations in level of activity
Examples:
Total fixed costs do not change, but the fixed
cost per event depends on the number of events
Have both a fixed and variable component
Example:
provider
COST-VOLUME ANALYSIS MEANING
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.
1. CONTRIBUTION MARGIN APPROACH
2.PROFIT VOLUME RATIO
3 BREAK EVEN ANALYSIS
4. MARGIN OF SAFETY
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
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%
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
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
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
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 :