UNIT V

MARGINAL COSTING and BREAK-EVEN

ANALYSIS

Production cost

Fixed cost

Variable cost

TYPES OF COST

• Does not vary with the volume of output over a short period of time

Fixed cost

• Changes directly with the volume of output

Variable cost

• Partly fixed and partly variableSemi-

variable or Semi-fixed

cost

Remain fixed over long period of time

Does not change with volume of production

Treated as period cost High FC, higher break even Insurance, interest

expense, property taxes, utilities expenses and depreciation of assets.

FIXED COST

Fixed cost= Rs.50000 5000 units

Rs.10 per phone

Fixed cost= Rs.50000 10000 units

Rs.5 per phone

Changes with the volume of output

Cost of raw material, labor, packaging charges etc

Reveals the performance of business

More production, high VC

VARIABLE COST

Produces 60 pizza Cost of raw material= Rs. 6000

Produces 40 pizza Cost of raw material= Rs. 4000

Marginal costing is defined as, ”the amount of any given volume of output by which

aggregate costs are changed if the volume of output is

increased by one unit”

MARGINAL COST

Manufactures computer

ABC ltd. Manufactures 100 units of computer at Rs. 5,000 each. The total cost of manufacturing 100 units is Rs.

500,000

They decided to produce 1 extra

unit. Then the cost of producing 101

units would be Rs. 505,000. Thus ,

the Marginal cost is Rs. 5,000 i.e., 505000-500000

The Institute of Cost and Management Accountants, London, defines marginal costing as: “the ascertainment of marginal costs and of the effect on

profit of changes in volume or type of output by differentiating between fixed and variable cost”

Concerned with changes in cost and profit resulting from changes in volume of outputA.k.a. “variable costing”Marginal costing= Change in cost

Change in quantityBreak-even analysis

MARGINAL COSTING

CHARACTERISTICS OF MARGINAL COSTING

Decision making

Inventory valuation

Linkage of cost and activity

Pricing Fixed and Variable

Cost

Marginal Costing and

profit

Technique of analysis and presentation of costs which helps management in taking many managerial decisionsElements of cost production (administration, distribution, selling) are classified as fixed and variable componentsVariable cost as the cost of the productFixed cost period costFinished goods and work-in-progress are valued at marginal costPrices are determined on the basis of marginal cost

ASSUMPTIONS OF MARGINAL COSTING

Techniques of marginal costing are based on the following assumptions :

Elements of cost-

Variable cost fluctuates directly in proportion to change in the volume of outputSelling price per unit may remain unchanged or constantFixed costs does not change for entire volume of outputVolume of production is the only factor which influences the costs

FIXED COST

VARIABLE COST