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MODULE V
Cost Volume Profit analysis-Standard costing- Analysis of Material and Labour Variances
MARGINAL COSTING
The basic objectives of Cost Accounting are cost ascertainment and cost control
...
Marginal costing
and Break even analysis are important techniques used for cost control and decision nmaking
...
It is the
addition made to total cost when the output is increased by one unit
...
Marginal cost of nth unit = Total cost of nth unit- total cost
Eg
...
5000
...
e, 101
of n-1
units, total cost is Rs
...
Then marginal cost of 101th unit is Rs
...
The chartered Institute of Management Accountants [CIMA] England defines Marginal as "the amount
atany
given volume of output by which aggregate costs are changed if the volume of output is increased or
decreased by one unit
MARGINAL COSTING
It is the technique of costing in which only marginal costs or variable are charged to output or production
...
Fixed costs are not charged to output
...
Therefore, these fixed costs are directly transferred to Costing Profit and Loss
Account
...
of
assumed that all costs can be classified into fixed and variable costs
...
Variable costs
in direct
proportion with
the volume of
output
...
Fixed costs
marginal
are
first
an
index of
profitability
...
It is
not
met out of contribution and
profit
...
only
fixed relationship with sales
...
Contribution = Sales --Variable cost
Marginal cost equation
Sales-Variable Cost = Contribution
Contribution = Fixed costs + Proit
Therefore, Fixed cost = Contribution-Profit
PROFIT VOLUME RATIO [PV RATIOJ
...
an
absolute
measure
of profitability but it
Therefore, the contribution is related
cannot
to volume
be used for
comparison
of two
products
or
of sales
...
profitability
of the
product
will also be
higher
...
It is
Marginal cost statement
The
Marginal
cost statement
is a profitability statement prepared
prepared in the following format
...
It is simple to understand and easy to apply to any firm
2
...
Fixed costs are transferred to costing profit and
Loss account
...
It also prevents the illegal carry forward in stock valuation of some proportion of current years fixed cost
...
The effect of different sales mix on profit can be ascertained and management can adopt the optimum sales mix
5
...
Disadvantages
Important disadvantages of marginal costing are
1,All Assumptions of marginal costing are not appropriate
...
2
...
3
...
4
...
5
...
BREAK EVEN ANALYSIS
Every business is interested in ascertaining the breakeven point
...
It is the point of no profit or no loss
...
The firm ceases to incur losses at this point or it
starts to earn a profit from this point
...
43|P a Be
1
...
Break even point in value = Total Fixed costs or Total Fixed cost x sales/ P/V Ratio Contribution
3
...
P/V Ratio
2
...
Breakeven point in Value
Given:
Selling price per unit Rs
...
12
Fixed costs Rs
...
PV Ratio = Contribution/Sales x 100=20-12/20x100 = 40 %
2
...
Breakeven point in value = Fixed costs = 32000/40 x100 = Rs
...
The fim can decide upon the target return or profit in advance
...
The volume of sales required to achieve the desired level of profit may be
computed as follows -
Number of units to be sold = Fixed costs + desired Profiv Contribution per unit
Sales volume required = Fixed costs+ Desired Profits/ P/V Ratio
Illustration 3
Product A is sold at a unit selling price of Rs
...
32
...
40000
...
The number of units to be produced to break even
2
...
10000
Solution
Contribution = SP-VC = 40-32 = 8 per unit
1
...
Number of units to be sold to
Fixed Cost
+
Desired Profit
earn a
=
4000/8
5000 units
...
10000
40000+10000/8
=
=
=
6250 units
Contribution per unit
Break Even Chart
It is the
graphical presentation
fixed costs
...
point
...
It is constructed using a database of variable costs, fixed costs, total costs and sales
Output,
The units of output
and sales
are
or
sales
plotted along
revenue are
plotted along
the X
axis, using
the Y axis
...
It forms
a
measurement
...
The variable cost line is plotted next, starting
from zero it progresses continuously indicating that the variable cost increase with the volume fixed cost line of
sales
...
It starts from the fixed cost line on the Y axis and
follows the same patterm of variable cost line
...
It starts from the zero and progresses
continuously, indicating that the sales increase with larger units of output
...
A vertical line drawn to the X axis from this point shows the
volume of output required to Break even
...
The width
of the angle represents the rate of profitability i
...
It is the excess of
actual sales over break even sales
...
Margin of safety
Margin
of safety
=
Actual sales- Break even sales
=
Profit/P/V Ratio
Or Profit margin ofsafety x P/V Ratio
Illustration 5
Calculate BEP and Margin of safety from the following?
Sales 50000 units @ Rs
...
3 per unit
Variable overhead Rs
...
75000 per annum
Solution- BEP
75000
Fixed Cost
=
=
37500 units
SP- VC per unit 6-4
BEP in value = 37500 x 6= 225000
Margin of safety
=
Actual sales
-
BE sales
=
[50000x6]-225000= Rs
...
Period I Period II
Sales 300000 320000
Total cost 260000 272000
Calculate
1
...
Profit when sales are Rs
...
3
...
50000
Solution:
P/V Ratio Change in Profit
Change in Sales
=
profit
Change
in
Change
in Sales
=
=
x
100
48000-40000= 8000
320000-300000
=
Rs
...
BEP
=
=
Contribution
Fixed
Profit
=
are
Profit
-
8000/40
=
100
x
=
Rs
...
360000
360000x40/100
Contribution
=
Rs
...
Profit when sales
Contribution
40/100
x
144000-80000=Rs
...
50000
required to earn a profit
Fixed cost + Profit required
Contribution required
P/V ratio
Sales Contribution requires/
3
...
325000
Analysis [ CVP Analysis)] (5 marks)
is a n a r r o w
volume on profit
...
volume profit analysis
...
It helps management
Cost-Volume Profit
analysis the relationship
planning,
decision
between cost, volume and
profit
cost control
...
variable components
...
e,
at
The
ever output is produced,
the same is sold
during that
period
...
When the output is zero, total
When the output