m arginal c osting

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 JOIN KHALID AZIZ

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

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

m arginal c osting