Project Marginal Costing

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A PROJECT REPORT ON

“PROJECT ON MARGINAL COSTING”

MR.ZINE SAGAR VIJAY SANGITA,

ROLL NO: 6279

M.Com.2 SEM- I

(ADVANCE ACCOUNTANCY)

ACADEMIC YEAR: 2014-15

SUBMITTED BY

Under the guidance of PROJECT GUIDE

PROF.M. S. GANAGI

SUBMITTED TO UNIVERSITY OF MUMBAI

MULUND COLLEGE OF COMMERCE

S N ROAD, MULUND (WEST)

MUMBAI – 400080

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DECLARATION FROM THE STUDENT

I, Mr.ZINE SAGAR VIJAY SANGITA, the student of MULUND

COLLEGE OF COMMERCE, S.N Road, Mulund (W), Mumbai 400 080,

studying in M.Com part-I(ADVANCE ACCOUNTANCY) here by

declaring that I have completed this project “PROJECT ON MARGINAL

COSTING” during the academic year 2014-15. The information submitted is

true and original of best of my knowledge.

Date: 25th March, 2015 Signature:

Place: MUMBAI

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CERTIFICATE

I, Prof.M. S. GANAGI, here by certify that Mr. ZINE SAGAR VIJAY

SANGITA of MULUND COLLEGE OF COMMERCE, S.N Road,

Mulund (W), Mumbai 400 080, studying in M.Com part-I (ADVANCE

ACCOUNTANCY) here by declaring that I have completed this project

“PROJECT ON MARGINAL COSTING” during the academic year 2014-

15. The information submitted is true and original of best of my knowledge.

Signature: (Project Guide) Signature (Principal)

Signature: (Co-Ordinator) Signature: (External Examiner)

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ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Principal of Mulund

College of Commerce DR. (Mrs.) ParvathiVenkatesh, Course -

Coordinator Prof. Rane and our project guide Prof.M. S. GANAGI, for

providing me an opportunity to do my project work on “PROJECT

ON MARGINAL COSTING”. I also wish to express my sincere

gratitude to the non - teaching staff of our college. I sincerely thank

to all of them in helping me to carrying out this project work. Last but

not the least, I wish to avail myself of this opportunity, to express a

sense of gratitude and love to my friends and my beloved parents for

their mutual support, strength, help and for everything.

Date:25thMarch,2015 Signature:

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Index

Chapter No. Contents Page No.

1 Introduction of Marginal Costing 2-4

2 Meaning and Definition 4-5

3 Features of Marginal Costing 5

4 Advantages of Marginal Costing 6

5 Disadvantages of Marginal Costing 7

6 Basic principal of Marginal Cost pricing 8

7 Absorption Costing (meaning) 8

8 Advantages and disadvantages 9

9 Marginal costing V/S Absorption Costing 10-11

10 Contribution Analysis 12-13

11 Break-even-analysis 13-14

12 Assumption and Limitation 15-16

13 Cost-Volume profit (C.V.P) Analysis 17

14 Marginal costing and Decision making 18

15 Technique of Costing 19-21

16 Marginal Cost equations 22-25

17 Absorption Costing pro-forma 25-26

18 Marginal Costing pro-forma 27

19 Problems 28-37

20 Conclusion 38

21 Sources 39

INTRODUCTION TO MARGINAL COSTING

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The costs that vary with a decision should only be included in decision analysis. For

manydecisions that involve relatively small variations from existing practice and/or are for

relativelylimited periods of time, fixed costs are not relevant to the decision. This is

because either fixedcosts tend to be impossible to alter in the short term or managers are

reluctant to alter them in theshort term.Marginal costing distinguishes between fixed costs

and variable costs as convention allyclassified.The marginal cost of a product –“is its

variable cost”. This is normally taken to be; direct labor,direct material, direct expenses

and the variable part of overheads.      

Like Marginal costing or job costing, Marginal costing is not a distinct method of

ascertainment of cost but is a technique which applies existing methods in a particular

manner so that the relationship between profit & the volume of output can be clearly

brought out. Marginal costing ascertains marginal or variable costs & the effect on profit,

of the changes in volume or type of output, by differentiating between variable costs &

fixed costs. To any type of costing such as historical, standard, Marginal or job; the

Marginal costing technique may be applied.   

 Under the Marginal of Marginal costing, from the cost components, fixed costs are

excluded. The difference which arises between the variable costs incurred for activities &

the revenue earned from those activities is defined as the gross margin or contribution. It

may relate to total sales or may relate to one unit.

 For the business as a whole, Contribution earned by specific products or group of

products, are added so as to calculate the ‘pool’ of total contribution. The fixed costs of

the business are paid from this ‘pool’ & then the part of the total contribution which

remains becomes the profit of the business as a whole.

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A typical format for Marginal costing statement is as below:

Product types or departments          A                     B                     C                    Total

Sales Revenue                                   X                     X                     X                     X

Less Variable cost of production       X                    X                     X                     X        

Contribution                                       X                     X                    X                     X

Less: Fixed Costs                                                                                                   X

Total Profit                                                                                                              X

Under Marginal costing, for the calculation of profits for individual products or

departments, no attempt is made- only calculation of individual Contribution is done. The

fixed cost does not allocated to or gets absorbed by the individual products or departments.

Thus, accounting techniques relating to the treatment of fixed costs will not influence the

decisions which are based on Marginal costing system.

Examples of typical problems which require executive decisions are:

At a lower price should a particular order be accepted or declined?

Should purchase of a particular component be made from an outside supplier or

manufactured within the factory?

Concentration should be given on which products?

By which profit-mix, profit will be maximized?

What should be the effect on the business when an existing department is being

closed or a new department is being opened?

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To make up for wage rise, what should be the additional volume of business?

MEANING OF MARGINAL COSTING

It is the amount by which total cost increases when one extra unit is produced, or the

amount of cost which can be avoided by producing one unit less.Accordingly, marginal

cost may also be defined as the variable cost incurred due toa specific activity. It is

concerned with variable costs, because fixed costs bydefinition do not change with the

volume produced.

DEFINATION OF MARGINAL COSTING

The Official C.I.M.A Costs of the Terminology defines Marginal costing as,

³Theaccounting system in which variable costs are changed to costs units and fixed period are written off

in full against the aggregate contribution. Its special value isin decision-making´Accordingly,

Marginal cost = Variable cost = Direct material + Direct labor +Direct expenses +

Variable overheads.

Marginal costing is formally defined as:‘the accounting system in which variable costs are

charged to cost units and the fixed costs of the period are written-off in full against the

aggregate contribution. Its special value is in decisionmaking’.The term ‘contribution’

mentioned in the formal definition is the term given to the difference between Sales and

Marginal cost. ThusM A R G I N A L C O S T = V A R I A B L E

C O S T D I R E C T L A B O U R   +DIRECT MATERIAL+DIRECT

EXPENSE+VARIABLE OVERHEADSCONTRIBUTION SALES - MARGINAL

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COST.The term marginal cost sometimes refers to the marginal cost per unit and

sometimes to the totalmarginal costs of a department or batch or operation. 

FEATURES OF MARGINAL COSTING

Classification of costs into fixed costs & variable costs is done under Marginal

costing system. Also semi-fixed or semi-variable cots get further classified into

fixed & variable elements.

To the product, only variable elements of cost, which constitute marginal cost, are

attached.

After the marginal cost & marginal contribution are taken into consideration; price

is fixed.

From the total contribution for any period, fixed cost for the period are deducted.

The profitability of a department or product is decided by the marginal

contribution.

At variable production cost, the valuation of work-in-progress & finished product

is made.

ADVANTAGES OF MARGINAL COSTING

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As there is involvement of computation of variable costs only in Marginal costing,

it is easy to understand & operate the same.

Among different products or departments, arbitrary apportionment of fixed costs is

avoided & the under-recovery or over-recovery problems are eliminated.

Any attempt of measurement of relative profitability of different products or

different departments becomes complicated due to the arbitrary apportionment of

fixed costs.

Analysis of contribution, break even charts & analysis of cost-volume-profit-

analysis are resulted out of a Marginal costing system; for making short term

decisions all of these are important.

More uniform & realistic figures are resulted out of Marginal costing system

because fixed overhead costs are excluded from valuation of stock & work-in-

progress.

Apportionment of responsibility of control can be more easily done since to each

level of management only variable costs are presented over which they have

control.

The effects of their decisions can be more readily seen by all levels of

management- sometimes even before taking of an action.

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DISAVANTAGES OF MARGINAL COSTING

The Marginal of separating semi-variable or semi-fixed costs into their variable &

fixed elements is an arbitrary exercise which at different levels of output may be

subject to fluctuations & inaccuracy. Consequently, a substantial degree of error may

be contained in the basic cost information which is used in decision making

Marginal.

When selling prices are based on marginal costs, great care need to be exercised, as

in the long run, all fixed overheads should be covered by the prices & a reasonable

margin over & above the total costs should be left.

Under many circumstances, the deduction of contribution made by some

production units may be difficult. Thereby the effectiveness of the system is lost.

Since on the basis of variable costs only the valuation of stock of finished goods &

work-in-progress is done, they are always understated. As result profit is also

understated.

More effective utilization of present resources or by expansion of resources or by

mechanization, increased production & sales may be effected. The disclosure of

this fact cannot be done by Marginal costing.

BASIC PRINCIPAL OF MARGINAL COST PRICING

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For years economists have noted the benefits of marginal cost basedprices and have

advocated their use. Not until fairly recently, however,has the concept of marginal cost

pricing received widespread attention inelectric utility ratesetting in the United States.

Economic theory statesthat maximum economic benefits to society can be achieved if

prices are setequal to marginal costs. Marginal cost is the cost of producing one

additionalunit of an industry's output, other things remaining the same. Ifthe price of all

units sold is set equal to the marginal cost, the customerwill pay an amount that adequately

reflects the cost to society ofproducing the product. In this way, economic efficiency is

achieved inthat society's scarce resources are used in productive Marginal’s where

theprices of finished goods and services adequately reflect the actual costsof producing

them.

ABSORPTION COSTING

MEANING

Absorption costing refers to the analysis of the cost data for the purpose of allotment of

costs to cost units. In absorption costing fixed as well as variable costs are charged to

products. We have already seen in the previous chapters on unit costing, Marginal costing

and contract costing, how the direct costs and overheads, whether fixed of variable, are

charged to the individual product, Marginal or contract. The Technique of absorption

costing thus refers to the principal of allocation, apportionment and absorption of costs

used for ascertaining the cost of a product, Marginal or contract.

Advantages of Absorption Costing:

It recognizes the importance of fixed costs in production;

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This method is accepted by Inland Revenue as stock is not undervalued;

This method is always used to prepare financial accounts;

When production remains constant but sales fluctuate absorption costing will show

less fluctuation in net profit and

Unlike Marginal costing where fixed costs are agreed to change into variable cost,

it is cost into the stock value hence distorting stock valuation.

Disadvantages of Absorption Costing:

As absorption costing emphasized on total cost namely both variable and fixed, it

is not so useful for management to use to make decision, planning and control;

As the manager’s emphasis is on total cost, the cost volume profit relationship is

ignored. The manager needs to use his intuition to make the decision.

MARGINAL COSTING V/S ABSORPTION COSTING

         The difference between Marginal costing& absorption costing is as below:

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1. Under Marginal costing: for product costing & inventory valuation, only variable

cost is considered whereas, under absorption costing; for product costing &

inventory valuation, both fixed cost & variable cost are considered.

2. Under Marginal costing, there is a different treatment of fixed overhead. Fixed cost

is considered as period cost & by Profit/Volume ratio (P/V ratio), profitability of

different products is judged. On the other hand, under absorption costing system,

the fixed cost is charged to cost of production. A reasonable share of fixed cost is

to be borne by each product & thereby subjective apportionment of fixed

overheads influences the profitability of product.

3. Under Marginal costing, the presentation of data is so oriented that total

contribution & contribution from each product gets highlighted. Under absorption

costing, the presentation of cost data is on conventional pattern. After deducting

fixed overhead, the net profit of each product is determined.

4. Under Marginal costing, the unit cost of production does not get affected by the

difference in the magnitude of opening stock & closing stock. Whereas, under

absorption costing, due to the impact of the related fixed overheads, the unit cost of

production get affected by the difference in the magnitude of opening stock &

closing stock.

Effects of opening & closing stock on profit:

         When income statements under absorption costing &Marginal costing are compared,

the under mentioned points should be considered:

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1. The results under both the methods will be same in situations where sales &

production coincide i.e., there is neither opening stock nor closing stock.

2. Profit under absorption costing will be more than the profit under Marginal

costing, when closing stock is more than the opening stock. The reason behind this

is that, under absorption costing, a portion of fixed overhead, instead of being

charged to the current period, is charged to the closing stock & carried over to the

next period.

3. Profit shown under absorption costing will be lower than the profit shown under

Marginal costing, when closing stock is less than the opening stock. The reason

behind this is that, under absorption costing, to the current period, a portion of

fixed cost related to previous year is charged.

Reconciliation of results of absorption costing &Marginal costing:

         When comparison of the results of absorption costing &Marginal costing is

undertaken, the adjustments for under- absorbed & / or over absorbed overheads becomes

necessary. Under absorption costing, on the basis of normal level of activity, the fixed

overhead rate is predetermined. A situation of under-absorption &/or over-absorption

arises when there is a difference between actual level of activity & normal level of

activity.

(i) Under-absorbed fixed overhead = Excess of normal level of activity over actual level of

activity * Fixed overhead rate per unit.

         If there is under-absorption, the profit under absorption costing, before comparison

with profit as per Marginal costing, should be reduced with under-absorbed fixed

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overheads. Alternatively, by adding the under-absorbed fixed overhead to the cost of

production, the same objective can be achieved.

(ii) Over absorbed Fixed overhead = Excess of actual level of activity over normal level of

activity * Fixed overhead rate per unit.

         If there is over absorption, then before the comparison of profit as per absorption

costing with the profit as per Marginal costing, with over-absorbed fixed overheads, the

profit under absorption costing should be increased. Alternatively, by reducing the over-

absorbed fixed overhead from the cost of production, the same objective can be achieved

CONTRIBUTION ANALYSIS

Contribution is the most important concept in Marginal costing. It is, as seen above equal to Sales

Less

Variable Cost. Contribution is the profit before adjusting the fixed costs. Marginal costing is

concerned with the `product costs` rather than the `periods costs`. Contribution indicates the

Product profit = product Income – product cost i.e.

Contribution = sale Value – Variable cost.

Marginal costing assumes that ht excess of sales value over variable costs contributes to a fund

which will cover fixed costs as well as provide the concern`s profits. The amount of contribution is

credited to the marginal profit and loss account. The fixed costs are debited to the marginal profit

and loss account. If the contribution is equal to the fixed costs, the concern is said to break- even

profit. If the contribution is less than the fixed costs, there will be net loss. Thus, the fixed costs

which are period costs do not affect the product cost. Fixed costs are directly adjusted in the profit

and loss account prepared for the relevant period. The concept of contribution plays a key role in

assisting the management in taking many important decisions such as-

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1. Deciding the break-even point,

2. Deciding which article to produce, or continue or discontinue to produce,

3. Deciding the quantity of each article to be produce or sold,

4. Fixing the selling price, especially in a trade depression, or for a special order.

The difference between contribution and accounting profit is explained below.

No.

1.

2.

3.

Contribution

It is a concept used in Marginal costing.

It is before deducting Fixed Costs.

At break- over point, Contribution is equal to

fixed cost.

Profit

It is an accounting concept.

It is after deducting Fixed Costs.

Profit arises only when Sales go beyond

the break- even point.

BREAK – EVEN ANAYSIS

Break – even point means the point of no profit and no loss. BEP is the volume of output or sales

at which the total cost is exactly equal to the revenue. Below the BEP the concern makes losses, at

the BEP, the concern makes neither profit nor loss, above the BEP, the concern earns profits.

The focal point of this analysis is the determination of the sales volume (in pesos or in

units) that will equal its total revenues to its total costs, thus, where the profit equals zero.

As stated earlier, since direct connection of expenses to production cannot be conclusively

established under functional classification of costs, analysis under CVP, as well as BE

analysis, is directed towards cost behavior. Thus, if we reclassify our costs from functional

to behavioral, our income statement would look like this:

Sales xx

Less: Variable Cost (VC) (xx)

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Contribution Margin (CM) xx

Less: Fixed Cost (xx)

Profit (loss) xx

 Contribution Margin (CM) is the excess of sales over variable cost or the excess from

sales when variable costs are deducted. It can be computed per unit or total. In computing

for the CM per unit, simply deduct the VC per unit from the selling price of each unit. This

is also synonymous with marginal income, marginal balance, profit contribution and

others.

Assumptions and Limitations Underlying                 BREAK-EVEN ANALYSIS

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1.   All costs are classified as either fixed or variable. If not impossible or impractical,

dividing costs into the variable and fixed cost elements as an extremely difficult

job. This is attributable to the inherent nature or characteristics of the cost per se.

2.   Fixed costs remain constant within the relevant range. Fixed costs remain

unchanged at any level of activity within the relevant range, even at the zero level.

3.   The behavior of total revenues and total costs will be linear over the relevant

range, i.e. will appear as a straight line on the BE chart. This is based on the idea

that variable costs vary in direct proportion to volume; the fixed costs remain

unchanged, hence drawn as a straight horizontal line on the graph within the

relevant range; and that selling price is constant.

4.   In case of multiple product companies, the selling prices, costs and proportion of

units (sales mix) sold will not change. This cannot always be correct. Sales mix

ratio may be due to the change in the consuming habits of customers. Selling prices

of the individual products may likewise change due to competition, popularity and

salability of the products, etc.

5.   There is no significant change in the inventory levels during the period under

review. Stated in another way, production volume is assumed to be almost (if not

exactly) equal to the sales volume, which causes an immaterial (or none at all)

difference between the beginning and ending inventories.

6.   Other assumptions which have already been discussed in the preceding numbers,

are again credited and highlighted here as follows:

o Unit selling price will remain constant.

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o  Unit variable cost will not change. (This may include

  prices of the factors of production like material       costs, labor costs etc.)

o  There will be no change in efficiency and productivity.

o  The design of the product will not change.(A change in       the design of

the product may bring about a change       in production costs, selling price

and production       volume.

o

Cost-Volume-Profit (CVP) Analysis      Cost-Volume-Profit (CVP) Analysis analysis is defined as a systematic examination of

the relationships among costs, activity levels, or volume, and profit. CVP analysis

establishes the relationship of profit to level of sales. And one of these relationships is the

Break-even analysis.

     Since direct connection of expenses to production cannot be conclusively established

under functional classification of costs, analysis under CVP is directed towards cost

behavior; the way costs behave or change with respect to a change in the activity level.

Costs can be classified according to its behavior as:

1. Fixed Costs

     These are costs that do not change regardless of changes in the level of activity

within a relevant range. In other words, they remain constant regardless of the

change in the activity level per total; however, fixed cost per unit is inversely

proportional to the activity level.

2. Variable Costs

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     In total, these costs change directly and proportionately with the level of

activity. As the activity level increases, variable cost per total will also increase

proportionately to the increase in activity level. However, variable cost per unit

remains constant, within the relevant range.

3. Semi-Variable Costs

     Costs that varies with the change of activity level but not proportionately, they

are called semi-variable costs. They may either increase at an increasing rate or

increase at a decreasing rate. A typical example of this is the cost of electricity

(increasing at an increasing rate) because it is subject to graduated brackets, thus,

the greater the consumption, the higher the rate per kilowatt hour as they will be

categorized in a higher bracket.

4. Semi-Fixed Costs

     This kind of costs has the characteristics of both variable and fixed cost and is

usually known as the step function cost or step cost. Like semi-variable cost, semi-

fixed cost increases with activity level but not proportionately. And like fixed cost,

it is constant for some stretches of activity levels.

5. Mixed Costs

     Costs that cannot be identified by a single cost behavior pattern are called mixed

costs. This kind of cost is composed of variable and fixed cost. We have concluded

earlier that costs are more meaningful when they are classified according to

behavior. When costs therefore are mixed, it is important that we know how to

segregate them. Some tools and techniques popularly used are the High-Low

Method, Scatter Graph Method, Regression Analysis, and Correlation

MARGINAL COSTING AND DECESSION MAKING

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The supreme goal of every management is to maximize profits. To achieve this goal, management

has to take several decisions regarding the marginal unit, the product mix, the pricing, making or

buying an Article and so on. It has also to ascertain the cost that are controllable and establish a

system to actually control them. Marginal costing is an effective policy decisions such as pricing,

product mix, special offers, discontinued a product, optimum level of production, cost control and

so on. It also help in ‘profit planning`. Marginal costingenables the management to study different

scenarios (cost and revenue situations) under various alternatives. The management can plan its

short- term profits.

WHEN MARGINAL COSTING IS USEFUL FOR FIXING PRICE

Marginal costing helps the management in taking price decisions. In Absorption costing, the prices

are fixed so as to cover the total costs which include Fixed Costs as well as Variable Costs. In

Marginal costing

the price can be fixed on the basis of only Variable Costs. This can be useful in the following situations

when supply exceeds demand

pricing of new products

utility services

cut-throat competition in market

Export orders or special orders.

Techniques of Costing

Besides the methods of costing, following are the types of costing techniques which are

used by management only for controlling costs and making some important managerial

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decisions. As a matter of fact, they are not independent methods of cost finding such as

job or Marginal costing but are basically costing techniques which can be used as an

advantage with any of the methods discussed above. 

1. Marginal costing

Marginal costing is a technique of costing in which allocation of expenditure to production

is restricted to those expenses which arise as a result of production, e.g., materials, labor,

direct expenses and variable overheads. Fixed overheads are excluded in cases where

production varies because it may give misleading results. The technique is useful in

manufacturing industries with varying levels of output.

2. Direct Costing

The practice of charging all direct costs to operations, Marginales or products and leaving

all indirect costs to be written off against profits in the period in which they arise is termed

as direct costing. The technique differs from Marginal costing because some fixed costs

can be considered as direct costs in appropriate circumstances.

3. Absorption or Full Costing

The practice of charging all costs both variable and fixed to operations, products or

Marginales is termed as absorption costing.

4. Uniform Costing

A technique where standardized principles and methods of cost accounting are employed

by a number of different companies and firms is termed as uniform costing.

Standardization may extend to the methods of costing, accounting classification including

codes, methods of defining costs and charging depreciation, methods of allocating or

apportioning overheads to cost centers or cost units. The system, thus, facilitates inter-

firm comparisons, establishment of realistic pricing policies, etc.

Systems of Costing

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It has already been stated that there are two main methods used to determine costs. These

are:

         Job cost method • Marginal cost method

It is possible to ascertain the costs under each of the above methods by two different ways:

         Historical costing

         Standard costing

Historical Costing

Historical costing can be of the following two types in nature:

         Post costing

         Continuous costing

Post Costing

Post costing means ascertainment of cost after the production is completed. This is done

by analyzing the financial accounts at the end of a period in such a way so as to disclose

the cost of the units which have been produced.

For instance, if the cost of product A is to be calculated on this basis, one will have to wait

till the materials are actually purchased and used, labor actually paid and overhead

expenditure actually incurred. This system is used only for ascertaining the costs but not

useful for exercising any control over costs, as one comes to know of things after they had

taken place. It can serve as

guidance for future production only when conditions in future continue to be the same.

Continuous Costing

In case of this method, cost is ascertained as soon as a job is completed or even when a job

is in progress. This is done usually before a job is over or product is made. In the

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Marginal, actual expenditure on materials and wages and share of overheads are also

estimated. Hence, the figure of cost ascertained in this case is not exact. But it has an

advantage of providing cost information to the management promptly, thereby enabling it

to take necessary corrective action on time. However, it neither provides any standard for

judging current efficiency nor does it disclose what the cost of a job ought to have been.

Standard Costing

Standard costing is a system under which the cost of a product is determined in advance

on certain pre-determined standards. With reference to the example given in post costing,

the cost of product A can be calculated in advance if one is in a position to estimate in

advance the material labor and overheads that should be incurred over the product. All this

requires an efficient system of cost accounting. However, this system will not be useful if

a vigorous system of controlling costs and standard costs are not in force. Standard costing

is becoming more and more popular nowadays

Marginal costing Equations

Sales – Variable Cost = Contribution

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Contribution – Fixed Cost = Profit

Sales – Variable Cost = Fixed Cost + Profit

Profit Volume Ratio = Contribution / Sales

Contribution = Sales * PV Ratio

Sales = Contribution / PV Ratio

BEP (in units) = Fixed Cost / Contribution per unit

BEP (in rupees) = Fixed Cost / Contribution * Sales

BEP (in rupees) = Fixed Cost / PV ratio

Required Sales (in rupees) = Fixed Cost + Profit / PV ratio

Required Sales (in units) = Fixed Cost + Profit / Contribution per unit

Actual Sales = Fixed Cost + Profit / PV ratio

Margin of safety (in rupees) = Actual Sales – BEP Sales

Margin of safety (in units) = Actual Sales (units) – BEP Sales (units)

Profit = Margin of safety * PV ratio

Ascertaining Missing figures

1. CONTRIBUTION

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= Sales – Variable Cost

= Fixed Cost + Profit

= Sales * PV Ratio

= (BE Sales in units * Contribution per units) + Profit

= (BE Sales in value * PVR ) + Profit

= Fixed Cost + (MS in units * Contribution per unit)

= Fixed Cost + (MS in value * PVR)

= Profit / MS in %

= Fixed Cost / BE sales in%

2. PROFIT VOLUME RATIO (PVR)

= Sales - Variable Cost / Sales * 100

= Contribution / Sales *100

= Fixed Cost + Profit / Sales *100

= Fixed Cost / BE Sales in value * 100

= Fixed Cost / BE Sales in units *100 / Selling price per unit

= Profit / Margin of safety in value *100

= Profit / Margin of safety in units *100 / Selling price per unit

= Change in profit / Change in sales *100

= 100 – Variable cost to sales ratio

3. BE SALES IN UNITS

= Fixed Cost / Contribution per unit

= BE Sales / Selling price

= Fixed Cost / S.P. per unit – Variable cost P.U

= Actual Sales per unit – Margin of safety in units

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4. BE SALES IN VALUE

= Fixed Cost / PVR

= Actual Sales in value – Margin of safety in value

= Fixed Cost / Contribution per unit * Selling price per unit

= BE Sales in units * Selling price per unit

= Fixed Cost / 1- Variable Cost / Sales

= Fixed Cost / % of Contribution to sales

5. BE SALES IN % OF SALES

= Fixed Cost / Contribution *100

= BE Sales / Actual Sales *100

= 100 – margin of safety (in %)

6. MARGIN OF SAFETY IN UNITS

= Profit / Contribution per unit

= Actual Sales in units – BE Sales in units

7. MARGIN OF SAFETY IN VALUE

= Profit / PV Ratio

= Actual Sales in value – BE Sales in value

= Profit / Contribution per unit * Selling price per unit

= Margin of Safety in units * Selling price per unit

8. PROFIT

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= Sales – Total Cost

= Sales – (Variable Cost + Fixed Cost)

= Contribution – Fixed Cost

= Margin of Safety in Value * PVR

= Margin of Safety (% of sales) * Total Contribution

= (Margin of Safety in % of Sales * Actual Sales) * PVR

9. SALES

= Total Cost + Profit

= Variable Cost + Fixed Cost + Profit

= Variable Cost + Contribution

= Contribution / PV ratio * 100

= BE Sales + Margin of Safety

ABSORPTION COSTING PRO-FORMA

£ £

Sales Revenue xxxxx

Less Absorption Cost of Sales

Opening Stock (Valued @ absorption cost) xxxx

Add Production Cost (Valued @ absorption cost) xxxx

Total Production Cost xxxx

Less Closing Stock (Valued @ absorption cost) (xxx)

Absorption Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxxx

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Absorption Cost of Sales (xxxx)

Un-Adjusted Profit xxxxx

Fixed Production O/H absorbed xxxx

Fixed Production O/H incurred (xxxx)

(Under)/Over Absorption xxxxx

Adjusted Profit xxxxx

Reconciliation Statement for Marginal costing and Absorption Costing Profit

$

Marginal costing Profit Xx

ADD

(Closing stock – opening Stock) x

OAR

Xx

= Absorption Costing Profit Xx

Where OAR( overhead absorption rate) =Budgeted fixed production overhead

Budgeted levels of activities

MARGINAL COSTING PRO-FORMA

£ £

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Sales Revenue xxxxx

Less Marginal Cost of Sales

Opening Stock (Valued @ marginal cost) xxxx

Add Production Cost (Valued @ marginal cost) xxxx

Total Production Cost xxxx

Less Closing Stock (Valued @ marginal cost) (xxx)

Marginal Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxxx

Marginal Cost of Sales (xxxx)

Contribution xxxxx

Less Fixed Cost (xxxx)

Marginal costing Profit xxxxx

Problems

Q.1 TheVijay Electronic Co. furnishes you the following income information of the year

1995.

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Year Sales in Rs Profit in

Rs

First half

…………..

Second half

…………..

4,05,000

5,13,000

10,800

32,400

From the above table you are required to compute the following assuming that the fixed

cost remains the same in both the periods.

(a) P/V Ratio.

(b) Fixed cost.

(c) Break - even point.

(d) Variable cost for first and second half of the year.

(e) The amount of profit or loss where sales are Rs 3,24,00.

(f) The amount of sales required to earn a profit of Rs 54,000.

Solution:

Year Sales in Rs Profit in

Rs

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First half

…………..

Second half

…………..

Difference

…………..

4,05,000

5,13,000

1,08,000

10,800

32,400

21,600

(a) P/V Ratio = Change in Profit/ Change in Sales*100

= 21,600/1,08,000*100 =20%

(b) Fixed Cost

S*(S/V) = F+P

4,05,000*20/100 = F+10,800

Or 81,000 = F+10,800

Or 81,000-10,800 = Fixed Cost

Or Fixed Cost = Rs 70,200

Total Fixed Cost = 70,200*2= Rs 1,40,400

(c) Break-even Point = Fixed Cost/P/V Ratio

= 1,04,400/20% = Rs 7,02,000

(d) Variable Cost

(i) For the 1st half

Sale – Variable Cost = Fixed Cost + Profit

Or 4,05,000-V.C. = 70,200 + 10,800

Or 4,05,000 -V.C. = 81,000

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Or 4,05,000-81,000 = VC

Or VC = Rs 3,24,000

(ii) For the 2nd half

Sales-Variable Cost = Fixed Cost+ Profit

5,13,000-VC = 70,200+32,400

5,13,000-VC = 1,02,600

5,13,000-1,02,600 = VC

VC = Rs 4,10,400

(e) The amount of profit/Loss where sales are Rs 3,24,000

Sales*(P/V) =Fixed Cost + Profit

3,24,000*20% = 1,40,400+Profit/Loss

64,800 = 1,40,400+Profit/Loss

Loss = Rs 75,600

(f) The amount of Sales required to earn a profit of Rs 54,000

Sales*(P/V) = Fixed Cost + Profit

Sales*(20%) = 1,40,400+54,000

Sales*20/100 = 1,94,400

20% of Sales = 1,94,400*100/20 = Rs 9,72,00

Q.2 A manufacturer of packing cases makes three main types- Deluxe, Luxury, and

Economy. Overheads are incurred on the basis of labour hours. Wages are paid at Re 1.00

per hour.

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Estimates for the cases show the following:

Particulars Deluxe

(Rs)

Luxury

(Rs)

Economy

(Rs)

Material

Wages

Overheads

Net Profit/loss

Average Selling Price

Annual Sales ( Units)

10.00

6.00

12.00

8.00

3.00

6.00

3.00

2.00

4.00

28.00

2.00

17.00

3.00

9.00

3.00

26.00

10,000

20.00

20,000

12.00

5,000

The manufacture felt that he would be well advised to discontinue producing the Deluxe

and economy cases even though it would mean that some of production facilities would

remain unused. He cannot increase the sale of luxury cases. It has been ascertained that

60% of the overheads is fixed.

You are required to advise the manufacture.

Solution:

Statement of cost and contribution

Particulars Deluxe Luxury Economy

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(Rs) (Rs) (Rs)

Material

Wages

Variable Overheads (40%)

Total Variable Cost

Selling Price

Contribution

Less: Fixed Cost (60%)

Net Profit / Loss

P/V Ratio (Contribution*100)/Sales

10.00

6.00

4.80

8.00

3.00

2.40

3.00

2.00

1.60

20.80

26.00

13.40

20.00

6.60

12.00

5.20

2.20

6.60

3.60

5.40

2.40

(-)2.80

5.20*100/26

=20%

3.00

6.60*100/20

=33%

3.00

5.4*100/12

=45%

Note: The above statement clearly explains that product Deluxe is incurring loss and also

its P/V Ratio is less as compared to other two products. Hence it is advisable, that the

manufacturer should discontinue the product “Deluxe” and increase the production of

products Luxury and economy.

Conclusions

When I thought of studying ‘Marginal costing and Decision Making’ first things in my

mind is that, this is only one topic in our syllabus of Mcom part-1 but really the concept

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are deep and hard and after doing this project I come to know that how the combine topic

which have give me 30 marks (Max) to score in writing exam is giving me knowledge of

variances analysis and its benefits to industry at different levels. It is really helpful to deal

with future topic of cost accounting.

The theoretical constructs of economics texts are of little use; the platitude that increasing

returns to scale cause marginal to fall below average costs being one example, since it

relates only to brand new built from scratch systems.

Marginal costs depend not only upon the timing of a postulated change in output but also

upon the timing of the decision to adapt to it. Marginal costs are forecasts, and forecasts

are rarely accurate. However, all decisions are founded upon uncertain expectations about

the future effects of current choices.

Marginal costing and decision making are rarely important concept of cost accounting and

help full concept are future. I hope marginal costing and decision making is really good

topic of costing. The technically using marginal costing and decision making are helpful.

Here I conclude that this is very useful Project work given me by my project guide Mrs.

Babitakakkaremadam. Once again I would like to thank her for this great opportunity .

SOURCES

BIBLOGRAPHY:

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Cost Accounting – Ainapure&Ainapure

Cost Accounting – Chaudhari, Chopade

WEBLOGRAPHY:

http: //dictionary.refrences.com

http: //www.idadesal.org

http: //www.accountingcoach.com

http://www.accountingtools.com

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