Marginal Costing

WHAT IS COST…
 Cost is the amount of expenditure (actual or notional) incurred on or

attributable to a specified thing or activity or cost unit.
 Notional cost is assumed to be your cost, can be treated as opportunity
cost …for example…Material X can be used for producing one unit of
A as well as B..Material X is available in short supply, if it is used for
producing one unit of A then you will get profit of rs.2 per unit, if it is
used for producing one unit of B, profit is rs.1so you have decided to
use it for A, while adding cost of material X to a product A, cost you
may consider cost as rs.3.Actual cost 2 and notional cost 1
COST ACCOUNTING…
Cost accounting is the process of accounting for cost.
 Objective of cost accounting…
(1) Ascertainment of cost

(2) Control of cost
(3) Preparation of cost
(4) Estimation of cost
(5) Reduction of cost
(6) Helpful in decision making
CLASSIFICATION OF COST…..
Element wise classification….Material, labour and expenses…
Function wise classification of cost..Production cost, administration
cost ,selling and distribution cost..
Nature of cost…Fixed cost and variable cost
WHAT IS MARGINAL COST?
 It is the cost of additional unit therefore same as variable cost.
 Marginal costing is based on contribution approach..
 Contribution is the difference between sales and variable cost.
MARGINAL COSTING IS A
TECHNIQUE OF COSTING….
 Format ie used in marginal costing
Sales(1) *****
Variable cost(2) *****
Contribution(3)=(1)-(2) *****
Fixed cost(4) *****
Profit(5)=(3)-(4) *****
FORMULAS IN MARGINAL
COSTING
1) Contribution=Sales-variable cost
2) Contribution =Fixed cost + Profit
3) Contribution-Fixed cost=Profit
4) Profit=Sales-Variable Cost- Fixed cost
5) Profit volume ratio=contribution/sales
6) Sales*PV ratio=Contribution
MCQ:
7) If sales is Rs.2 Lakhs, Fixed cost is Rs.30,000 and PV ratio is 40%
then, Profit is_____
a) 12,000 b)1,20,000 c)80,000 d) 50,000
2) Which is the correct marginal costing equation
a) P=S-V-F b) S-V=F-P c)F-L=S+V d)S=V+F-P
Where P is profit
V is variable cost
F is fixed cost
S is Sales
3) Marginal costing is _____ in cost accounting
a. Method
b. Technique
c. Method and technique
d. None of these
CALCULATE MISSING DATA
FOR FOLLOWING:
Particulars A B C D E
Selling price - 50 20 - 30
per unit
Variable 60 - 75 75 -
cost as% of
sales
Number of 10,000 4,000 - 6,000 5,000
units sold
contribution Rs.20,000 Rs.80,000 - Rs.25,000 Rs.50,000
PV ratio ? ? ? ? ?
Profit volume ratio for every product is calculated as follows:
FOR A= VC as a percentage of sales=60 it means contribution as a
percentage of sales would be 40.
Explanation: PV ratio=Contribution/Sales=Sales-Variable
Cost/Sales=100-60/100=0.40 OR 40%
For B= Contribution per unit= 80,000/4000=20
PV ratio=Contribution/Sales=20/50=0.40 OR 40%
For C=Variable cost as a percentage of sales= 75 Therefore, contribution
as a percentage of sales=25.
Cost/Sales=100-75/100=25/100=0.25 OR 25%
For D=PV ratio 25 percent Variable cost as a percentage of sales= 75
Therefore, contribution as a percentage of sales=25.
Cost/Sales=100-75/100=25/100=0.25 OR 25%
For E= Contribution per unit= 50,000/5,000=Rs.10 and PV ratio=
Contribution per unit/Selling price per unit=10/30=1/3=0.33 OR 33.333%
FORMULA FOR BREAKEVEN
POINT
Breakeven point indicates no profit, no loss situation. It is calculated as
follows:
1) BEP(Units)=Fixed cost/Contribution per unit
2) BEP(Sales)(In terms of Rs.)=Breakeven point in units*Selling price
per unit.
3) BEP=Fixed cost/PV ratio
4) BEP=Change in profit/Change in sales
PROBLEMS ON BREAKEVEN
POINT
1) SPPU Rs.20, VCPU=Rs.12, Total fixed cost=Rs.96,000. Calculate
BEP in units and value (Answer BEP=12,000 units, BES=Rs.
2,40,000.
2) When Fixed cost is Rs. 5,00,000, PV ratio is 40%, Calculate BES.
3) BEP=1000 units, Fixed cost is Rs. 2,000. So, Contribution per unit=?
4) Fixed cost Rs 4,000, Profit Rs. 1,000, BES is Rs. 20,000 then PV
ratio is =?
5) Contribution per unit is Rs.5, BEP=4,000 units. So, Fixed cost=?
PROBLEM ON BEP….
Product C=SPPU=200,VC is 70%=140 and total fixed cost is
rs.6,00,000.Calculate BEP for product C?
Ans: Contribution per unit=60
600000/60=10000(TFC/Contribution per unit)
BES(rs.)=600000/.30=2000000
BES(rs)=BEP(units)*SPPU=10000*200=2000000
EXTENSION OF THE
PROBLEM….
 If 8000 units of product C are sold in the market, Calculate profit or
loss…
480000-600000=-120000
 If 12000 units are sold in the market ,calculate profit or loss…..720000-
600000=120000
ASSIGNMENT :4 PROBLEM:1
 0utput=1000 units
 SPPU=100
 VCPU=40
Total fixed cost=30000

A)PV ratio=0.60=60/100=60%
B)BEP(units)=30000/60=500 units
C)BES=500*100=Rs.50000 or fixed cost/PV ratio=30000/0.60=rs.50000
CALCULATION OF SALES
BASED ON PROFIT
 E=profit 2000,total fixed cost=2000.If contribution ratio is 40%what
will be the sales?
Sales=?
VC=?
Contribution=(C/S)=.40
FC =2000
Profit=2000
REQUIRED SALES FOR
PROFIT OF RS.42000
 Sales=?
 VC=?
 Contribution=72000
 Fixed cost=30000
 Profit=42000
Contribution/sales=0.60
72000/sales=0.60
Sales=72000/0.60=120000
FORMULA FOR CALCULATING
REQUIRED SALES FROM DESIRED
PROFIT
 Required sales=
(Desired profit + fixed cost)/P.V.ratio

42000+30000/0.60=120000
PROBLEMS ON MARGINAL
COSTING…
1) Total fixed cost is rs.2,00,000,sppu =2000,VC is 80% of
sales .Calculate a)BEP(units)b)BES(Rs.)
BEP=500 units,BES=500*2000=1000000.
BES=200000/0.20=1000000
2) If sales rs.50000 and P.V ratio is 30%,Fixed cost is
rs.10000,Calculate Profit..(profit=5000)
3) If profit required is rs.1,00,000,total fixed cost is rs.1,00,000 and PV
ratio is 40%.Calculate sales=Sales=Rs.5,00,000
MARGINAL COSTING….
 Margin of safety=Actual sales-BES
 Actual sales rs.1,00,000 and BES is rs.70000 then calculate MOS?
=100000-70000=30000
TERMS USED IN MARGINAL
COSTING
 Contribution=Sales –variable cost or FC+Profit
 Contribution ratio=Profit volume ratio ratio=Contribution/sales
 BREAK EVEN POINT=TFC/contribution per unit
 Break even sales(rs.)=BEP(units)*SPPU
 Break even sales(rs)=TFC/P.V.ratio
CALCULATE PV RATIO……
year sales profit
2019 160000 20000
2020 180000 25000
ANSWER TO THE PROBLEM…
 PV ratio=Change in profit/change in sales=25000-20000/180000-
160000
 5000/20000=0.25
WHEN PROFIT AND SALES ARE
GIVEN FOR 2 DIFFERENT YEARS
 PV ratio=change in profit/change in sales
Change in profit=5000
Change in sales=20000
PV ratio=5000/20000=.25
Step:1..year 2019=sales=160000
Contribution for 2019=40000
Fixed cost=?
Profit =20000
Fixed cost=20000(contribution –profit)
Year 2020=180000*25%-FC=25000
FC=20000
PROBLEM CONTINUES….
 Sales required to earn a profit of rs.60000
 Profit when sales are rs.140000
 Contribution for required profit=60000+20000=80000
 PV ratio=.25
 80000/sales=25/100
 Sales=320000
CONTINUATION…
 Sales=140000
 Contribution=.25*140000=35000
 Profit=35000-20000=15000
PROBLEM ON MARGINAL
COSTING…
 Break even sales=100000
 Fixed cost=25000
(1) P/V ratio

(2) Profit when sales are rs.150000
(3) Sales to earn profit of rs.50000
 PV ratio=0.25 (BES=FC/PV ratio)=
 Profit=12500
 Sales=3,00,000,contribution =75000(50000+25000)
 75000/sales=25/100
 Sales=3,00,000
USEFUL FOR DECISION
MAKING
Product A and product B
Sales of product A=3000*100=3,00,000
Variable cost for product A=3000*60=180000
Fixed cost allocated to product A=120000
Profit=0
Sales of product B=5000*100=5,00,000
Variable cost=5000*60=300000
Fixed cost allocated =60000
Profit for B=140000
Guide whether product A should be discontinue? If you use marginal costing
technique what will be your answer?
Particulars A B
Sales(1) 300000 500000
Variable cost(2) 180000 300000
Contribution(3)=(1)-(2) 120000 200000
Fixed Cost(4) 120000 60000
Profit(5)=(3)-(4) nil 140000
IF YOU DISCONTINUE WITH
PRODUCT A
Particulars Product B
Sales 500000
Variable cost 300000
contribution 200000
Fixed cost 180000
Profit 20000
MAKE OR BUY DECISION USING
MARGINAL COSTING …
PROBLEM FROM ASSIGNMENT
 Note:1…If u make the product ,cost of making will be as follows…
 Direct material(variable cost)=20000
 Direct labour(variable cost)=16000
 Variable FOH=9000
 40% of Fixed factory overheads=6000(40% of 15000)
 Total variable cost=51000
 Total number of units that are made =10000
 Cost of making the product=5.1
a) If you make the product, cost is rs.5.1 and if u buy the product cost
is rs.5.80(5.30+0.50)
Conclusion to make because cost of making is less than cost of
buying(5.1<5.8)
b)If u make then addition cost of 7500 will be added to variable cost
because this space of manufacturing can be rented, therefore relevant
cost of making is 58500(51000+7500) for 10000 units
Therefore cost per unit is 5.85 however cost of buying is 5.80,therfore to
buy.(5.80<5.85)
FEW MCQ’S ON MARGINAL
COSTING AND COST SHEET
1) Showroom rent will be shown as -------overhead in cost accounting
a. Selling and distribution
b. Production
c. Administration
d. None of these
2) ……. cost are not included in cost sheet
a. Interest on loan
b. Audit expenses
c. Legal charges
d. None of these
3)Cost accounting is useful for…
a. Investors
b. Customers
c. Suppliers
d. Managers
4) Meaning of cost in cost accounting is same as….
a. Full Cost
b. Variable cost
c. Opportunity cost
d. All of the above
5) The breakeven point is the point at which:
a. There is no profit no loss
b. Contribution margin is equal to total fixed cost
c. Total revenue is equal to total cost
d. All of the above
6) Salary to factory supervisor will be shown as -------
a. Selling and distribution
b. Production
c. Administration
d. None of these
7) ……. cost are not included in cost sheet
a. Share issue expenses

b. Directors fees
c. Secondary packing
d. None of these

Marginal Costing

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WHAT IS COST…

 Cost is the amount of expenditure (actual or notional) incurred on or

(1) Ascertainment of cost

Total fixed cost=30000

(Desired profit + fixed cost)/P.V.ratio

(1) P/V ratio

a. Share issue expenses

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