Marginal Costing

MARGINAL COSTING TYPES OF EXPENSES

FIXED FIX ED EX EXPEN PENSES SES

VARIABLE EXPENSES

SEMI VARIABLE EXPENSES

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Marginal cost-The amount by which aggregate cost changes for an increase or  decrease in one unit of output.

Marginal cost equation 

S=P+F.C+V.C

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S-V.C=P+F.C

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S-V.C=CONTRIBUTION

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F.C+P=CONTRIBUTION

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Where S=Sales

P=Profit

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V.C=Variable Cost

F.C=Fixed Cost

Profit 

Volume Ratio

PV Ratio=(Contribution/Sales)*100

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=(Sales-Variable cost)/Sales

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=(Fixed Cost +Profit)/Sales

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(Or) PV Ratio=(Contribution per unit/S.P per 

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unit)*100

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=(S.P per unit-V.C per unit)/S.P per unit

Profit

Volume Ratio

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PV Ratio=

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(Change in profits/change in contributions)/Change in sales)*100

BREAK

EVEN POINT

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Break Even point is that level of sales at which the company earns no profit and no loss.

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BEP (Rs in Sales)=F.C/PV Ratio

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BEP (in units)=F.C/Contribution Per Unit

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 A Ltd sells 1000 units of product X in a year at Rs 100 per unit.The variable cost of the company is Rs 40 per unit and the fixed expenses are Rs 18000 per annum. Calculate the BEP of the company.

Solution 

BEP=F.C/PV Ratio

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PV Ratio=(S.P per unit-V.C per unit)/S.P per unit

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=((100-40)/100)*100

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=(60/100)*100

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=60%

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BEP=18000/60%

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=Rs 30000

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(or) 300 units

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Checking:

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Sales(300*100)

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Less:Variable Cost (40*300 )

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=30000 =12000

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Contribution

=18000

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Fixed Cost

=18000

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Profit/Loss

NIL

MARGIN OF SAFETY 

Margin of safety is that portion of sales which contributes towards the profit of the company

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Margin of Safety=Profit/PV Ratio

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 Actual Sales=BEP Sales+ Margin of Safety Sales

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2)What is the Margin of safety and BEP of the company if the company earns a profit of Rs 24000?The variable cost is Rs 40 pu and the fixed cost is Rs 18000.Total units sold are 700 at Rs 100 pu.

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Margin of safety=Profit/PV Ratio

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=24000/60%

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=Rs 40000

BEP 

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BEP = F.C/PV Ratio =18000/60% =30000

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Checking:

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BEP Sales(300*100)

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Less:Variable cost (300*40)

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=30000 =12000

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Contribution

=18000

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Less: Fixed Costs

=18000

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Profit

= 0

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Checking:   Actual Sales(700*100)

=70000

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BEP Sales (300*100)

=30000

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Margin of Safety Sales

=40000

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Less:Variable cost (400*40)

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Profit

=16000 =24000

Sales to earn a desired profit 

Sales (in Rs) to earn a desired profit = (F.C.+ Desired Profit)/PV Ratio

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Sales (in units) to earn a desired profit = (F.C.+ Desired Profit)/Contribution per unit

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HENCE

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(Sales*PV Ratio)- F.C = Desired Profit

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OR (Sales*PV Ratio)- Desired Profit = F.C.

 Assuming that the cost structure and selling price remain the same in Periods I and II ,find out  a)PV Ratio  b)Fixed Cost  c)BEP for sales  d)profit when sales are Rs 100000  e)Sales required to earn a profit of Rs 20000  f)Margin of safety at a profit of Rs 15000  G)Variable cost in period II Sales Profit  Period 120000 9000  I 140000 13000  II 

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 A) PV Ratio = Change in profits/change in contributions)/Change in sales)*100

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=((13000-9000)/(140000-120000))*100

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= (4000/20000)*100

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= 20% B)F.C = (Sales*PV Ratio)- Profits = (140000*20%) ± 13000 = 15000

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C) BEP = F.C/PVRatio

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=15000/20%

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=75000

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D) Desired Profit = (Sales*PV Ratio)- F.C = (100000*20%) -15000

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= 5000

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E) Sales (in Rs) to earn a desired profit = (F.C.+ Desired Profit)/PV Ratio

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(15000+20000)/20%

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175000

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F) MS= Profit/PV Ratio

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= 15000/20%

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= 75000

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G) V.C = 140000-15000-13000 = 112000

KEY OR LIMITING FACTOR  

 A key factor is a factor that puts a limit on production and profit of a business. This key factor may be shortage of materials ,labour,plant capacity etc.

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In this case we should choose that product which has gives maximum contribution per  unit of scarce resource.

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3)A Company has a machine 007 which can be used to produce either product A or B.The cost data relating to A and B are as follows: Product A Product B Selling price 20.00 30.00 Variable expenses 14.00 18.00 Contribution 6.00 12.00 Following additional information is also given a)capacity of machine 007 is 1000 hours b)In one hour machine 007 can produce 3 units of A and one unit of B Should the machine produce A or B?

Solution 

Particulars

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Selling Price Variable Cost Contribution Per unit No of units per hour Contribution per hour

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Product A

Product B

20 14 6 3 18

Hence we should produce product A as it gives a higher contribution per hour 

30 18 12 1 12