VC and MC

Cost Management

Class Discussion

Issues for discussion Marginal cost Marginal costing equation Contribution Contribution to sales ratio (CSR): Contribution Margin    

Marginal Costing  Cost of producing an additional unit of output  In short run, MC is the sum of the variable epenses  MC ! "C(n) # "C (n#$) MC ! %C & 'C(n) #%C&'C(n#$) MC ! 'C(n) #'C(n#$) 'ariable verheads  'C ! Direct Material & Direct *abour & Direct +penses & 'ariable Profit under Marginal Costing  Deduct 'C (') from Sales (S)  +cess of S over ' is called Contribution ( C )- S#' ! C  Deduct %ied cost from C to get profit  .!C#% C!%&.  Marginal Costing +quation: S#' ! %&.  It is important to note that the closing stoc/ is valued at MC %, there is no profit or loss i-e- it is 0+.  If C ! %,  If C 1 % , there is profit  If C 2 %, there is loss

Contribution to Sales Ratio (CSR): Contribution Margin  CSR ! C3S 4$55 r CSR ! S#'3S 4 $55 r CSR ! %&.3S 4$55  Change in profit3Change in sales   S ! $5, ' ! 6 so CSR ! 657 Breakeven Point (BEP) and Sales (BES)  0+. is the point 8here there is no profit or loss r Contribution ! %ied Cost ( C ! %) unit  0+. ! %3C, 9here C is Contribution per unit r 0+. ! %3S#'  0+S ! 0+. 4S  0+S ! %3CSR   Suppose % ! 65,555, S!$5, ' ! -;  C !