Marginal Costing Ppt (2)

MARGINAL COSTINGMARGINAL COSTING

Prepared By:Prepared By: Mandar Deshmukh - 69Mandar Deshmukh - 69 Nishank Gonsalves – 71Nishank Gonsalves – 71 Ganesh Injekar - 73Ganesh Injekar - 73 Reshma Kamble - 75Reshma Kamble - 75

DEFINITIONDEFINITION MARGINAL COST:MARGINAL COST: Marginal Cost is defined as the cost of one more Marginal Cost is defined as the cost of one more

or one less unit produced besides existing level of or one less unit produced besides existing level of production.production.

MARGINAL COSTING:MARGINAL COSTING: Marginal Costing is defined by ICMA, “the Marginal Costing is defined by ICMA, “the

ascertainment, by differentiating between Fixed ascertainment, by differentiating between Fixed and Variable Costs, of marginal costs, and of the and Variable Costs, of marginal costs, and of the effect on profit of changes in the volume and type effect on profit of changes in the volume and type of output.” of output.”

FEATURESFEATURES Cost ClassificationCost Classification

Stock / Inventory ClassificationStock / Inventory Classification

Marginal ContributionMarginal Contribution

ADVANTAGESADVANTAGES Easy to understandEasy to understand Constant in natureConstant in nature RealisticRealistic Relative profitabilityRelative profitability Aid to profit planningAid to profit planning Beak-even pointBeak-even point Pricing DecisionsPricing Decisions Meaningful reportingMeaningful reporting

LIMITATIONSLIMITATIONS Analysis of overheadsAnalysis of overheads Greater emphasis on salesGreater emphasis on sales Difficulty in applicationDifficulty in application Less effective in capital intensive industryLess effective in capital intensive industry Elimination of fixed costElimination of fixed cost Incomplete informationIncomplete information Useful only for short term assessmentUseful only for short term assessment Not acceptable for taxNot acceptable for tax..

TERMINOLOGY TERMINOLOGY CONTRIBUTION:-CONTRIBUTION:- Excess of selling price over variable cost.Excess of selling price over variable cost.

FormulaFormula : : C = S – VC = S – V Where,Where,C = ContributionC = ContributionS = SalesS = SalesV = Variable CostV = Variable Cost

Profit-volume Ratio (P/V ratio) :-Profit-volume Ratio (P/V ratio) :- When the contribution from sales is expressed as When the contribution from sales is expressed as

a percentage of sales value, it is known as P/V a percentage of sales value, it is known as P/V ratio.ratio.

FormulaFormula:: P/V ratio = P/V ratio = Sales – Variable Cost Sales – Variable Cost x 100x 100 SalesSales OR = OR = ContributionContribution x 100 x 100 Sales Sales

BREAK-EVEN POINT-GRAPHBREAK-EVEN POINT-GRAPH

BREAK-EVEN POINT:BREAK-EVEN POINT: It is the point at which total revenue is equal to total cost.It is the point at which total revenue is equal to total cost.

Formula:Formula: B.E.P. (units) = Fixed Cost B.E.P. (units) = Fixed Cost Selling Price – Variable CostSelling Price – Variable Cost OROR = Fixed Cost= Fixed Cost Contribution per unitContribution per unit

B.E.P. (Rs) = Fixed CostB.E.P. (Rs) = Fixed Cost Contribution per unitContribution per unit

OR = Fixed CostOR = Fixed Cost P/V Ratio P/V Ratio

PROFITPROFIT Profit is the excess of contribution Profit is the excess of contribution

over fixed cost.over fixed cost. Formula:Formula: Profit=Contribution-Fixed CostProfit=Contribution-Fixed Cost OR =M.O.S x P/V Ratio OR =M.O.S x P/V Ratio

MARGIN OF SAFETY :MARGIN OF SAFETY : It is the excess of present sales It is the excess of present sales

value over the break even sales. value over the break even sales. Formula:Formula: M.O.S = M.O.S = ProfitProfit P/V RatioP/V Ratio OR = Actual Sales – BEP Sales (Rs)OR = Actual Sales – BEP Sales (Rs) OR = Actual Sales(units) – BEP(units)OR = Actual Sales(units) – BEP(units)

EXAMPLEEXAMPLE FollowingFollowing is the data of Kedari Enterprises for the month of is the data of Kedari Enterprises for the month of

December 2009. They sold 2000 units of tablecloths in December 2009. They sold 2000 units of tablecloths in December.December.

Selling price p.u. Rs.10Selling price p.u. Rs.10 Variable cost Rs.10000Variable cost Rs.10000 Fixed Cost Rs.6000Fixed Cost Rs.6000 Solution:Solution:Sales = No. of units sold x selling price p.u.Sales = No. of units sold x selling price p.u. = 2000 x 10= 2000 x 10 =Rs. 20000 =Rs. 20000

1) Contribution = Sales – Variable Cost1) Contribution = Sales – Variable Cost = 20000 – 10000= 20000 – 10000 =Rs. 10000=Rs. 10000

2) P/V Ratio = 2) P/V Ratio = ContributionContribution x100 x100 Sales Sales = = 1000010000 x100 x100 2000020000 = 50%= 50%

3) Profit = Contribution – Fixed Cost3) Profit = Contribution – Fixed Cost = 10000 – 6000= 10000 – 6000 =Rs. 4000 =Rs. 4000

4) B.E.P.(R.s) = 4) B.E.P.(R.s) = Fixed CostFixed Cost P/V RatioP/V Ratio = = 60006000 50%50% = Rs.12000= Rs.12000

5) Margin Of Safety = 5) Margin Of Safety = ProfitProfit P/V RatioP/V Ratio = = 40004000 50%50% =Rs. 8000=Rs. 8000

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