This document provides an overview of marginal costing and cost-volume-profit (CVP) analysis. It defines key terms like marginal cost, contribution, fixed and variable costs. It explains the differences between marginal and absorption costing approaches. The objectives and concepts of CVP analysis are outlined, including break-even point, margin of safety, contribution ratio and angle of incidence. Formulas for calculating items like break-even sales, break-even point and composite break-even point are presented. Advantages and limitations of marginal costing are listed.
1. MEANING & DEFINITION
It is the additional cost of producing an additional
unit of a product.
Marginal cost= prime cost + total variable
overheads
J. BATTY: ‘ a technique of cost accounting which pays
special attention to the behavior of costs with changes
in the volume of output’.
6. DIFFERENCE BETWEEN MARGINAL AND ABSORPTION
COSTING
CHARGING OF COST
Fixed cost form part of total cost of production
and distribution.
VALUATION OF STOCK
Stock and work-in-progress are valued ay both
fixed and variable costs i.e, total cost.
Variable cost alone forms part of total
cost of production and sales whereas
fixed costs are charged against
contribution for determination of
profit.
Stocks are valued at variable cost only.
ABSORPTION COSTING MARGINAL COSTING
7. VARIATION IN PROFITS
When there is no sales the entire stock is
carried forward and there is no trading profit
or loss.
PURPOSE
It is more suitable for long term decision
making and for pricing policy over long term.
EMPHASIS
It lays emphasis on production.
If there is no sales the fixed overhead will be
treated as loss in the absence of contribution.
It is not carried forward as a part of stock
value.
It is more useful for short term managerial
desion making.
It lays emphasis on selling and pricing aspects.
ABSORPTION COSTING MARGINAL COSTING
8. COST-VOLUME-PROFIT ANALYSIS
Cost-Volume-Profit analysis is the analysis of three
variables, i.e. cost, volume and profit.
Cost-Volume-Profit analysis helps the management in
profit planning.
Profit of a concern can be increased by increasing the
output and sales or reducing cost.
“The most significant single factor in planning of the
average business is the relationship between the volume
of business, its costs and profit.”
-HEISER
9. OBJECTIVES
Cost-Volume-Profit analysis is made with the objective
of ascertaining the following:
The cost for various levels of production
The desirable volume of production
The profit at various levels of production
The difference between sales revenue and variable
cost.
10. CONCEPTS AND TERMS
1. FIXED COST
2. VARIABLE COST
3. CONTRIBUTION
4. CONTRIBUTION TO SALES/ PRROFIT VOLUME
RATIO
5. BREAK EVEN ANALYSIS
6. MARGIN OF SAFETY
7. ANGLE OF INCIDENCE
8. BREAK EVEN CHARTS
11. FIXED COST
Total of cost like “period cost” or “time costs”
Does not depend on volume of production and sales
Fixed costs remain constant
Fixed cost are fixed in total but variable in unit.
Eg: salary rent, manager’s salary etc known as
fixed overheads
12. VARIABLE COST
Increase or decrease in proportion to sales and
output.
Called as ‘product costs’ or ‘marginal costs’
Vary in direct proportion to output.
Variable costs vary in total but they remain constant
per unit.
Eg: direct material, direct wages etc
13. CONTRIBUTION
It’s the difference between sales and marginal costs
Used to find profitability of products, processes,
departments and divisions.
contribution = selling price-marginal cost
Contribution= fixed expenses + profit
Contribution – fixed assets = profit
14. CONTRIBUTION TO SALES /
PROFIT VOLUME RATIO
Relationship between sales and contribution
High P/V ratio indicate high profitability
Low P/V ratio indicate low profitability
Expressed in percentage
P/V ratio= contribution sales- variable fixed costs + profit
----------------- (or) ------------------- (or) ------------------------
sales sales sales
When two periods, profit and sales given then,
P/V ratio = change in profits
-----------------------
change in sales
15. BREAK EVEN ANAYSIS AND BREAK
EVEN POINT
Relationship between revenue and costs in relation
to sales volume
Determination of volume of sales at which total
costs are equal o revenue.
MATZ CURRY & FRANK : “ a break even analysis
determines at what level cost and revenue are in
equilibrium”
16. FORMULA
BREAK EVEN POINT:
B.E.P = fixed expenses fixed cost break even sales value
--------------------------------------------------------- (or) --------------------------- (or) --------------------------------
selling price per unit- marginal cost per unit contribution per unit selling price per unit
BREAK EVEN POINT OR BREAK EVEN SALES VALUE
B.E.S.V= break even point in units * salling price per unit (or) = fixed cost
----------------
P / V ratio
Break even ratio = break even sales
---------------------- * 100
actual sales
COMPOSITE BREAK EVEN POINT
Composite break even point in value = total fixed cost
----------------------------------------------------------------------------------------------------
Composite p/v ratio (= individual PV ratio * % of each product to total sales)
Break even capacity or break even point:
capacity B.E.P = B.E.P in units break even point in rupees
-------------------------------- * 100 (or) ------------------------------------ *100
total capacity in rupees total capacity in rupees
17. MARGIN OF SAFETY
Difference between actual sales and break even sales.
Indicate value/volume of sales which directly contribute to
profit
Expressed in rupees, units or even in percentage
margin of safety= actual sales- break even sales
(or) = profit
---------
P V ratio
Margin of safety ratio: expressed in ratio
Margin of safety ratio= margin of safety/ actual sales* 100
18. ANGLE OF INCIDENCE
Graphic presentation of marginal cost data
The angle at which the sales line crosses the total
cost line is called the ‘angle of incidence’
Bigger angle gives more contribution and profit with
additional sale
High P/V ratio and comparatively less variable
cost= high angle of incidence
Eg: break-even chart
19. BREAK EVEN CHARTS
Graphical representation of marginal costing
Show inter-relation between cost, volume & profit