marginal costing and cvp

8/11/2019 Marginal Costing and CVP

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Concepts to be discussed:

10/2/2014Chandrakant@SOM,KIIT University2

Concept of Marginal Cost and Marginal Costing

Marginal Cost Statement/Contribution Margin

Format

Cost-Volume-Profit Relationship Profit-Volume Ratio

Break-Even Point

Target Profit/Target Sales Computations

BEP Chart

Margin of Safety


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Marginal Cost

Marginal cost is amount at any given

volume of out put by which aggregate

costs are changed..

if volume of output

is increased or decreased by one unit



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Marginal Cost

Marginal cost is amount at any givenvolume of out put by which aggregate

costs are changed if volume of output

is increased or decreased by one unit

1. Manufacture 100 radio

Variable costs Rs150 p uFixed cost Rs 5000

2. If Manufacture 101 radios

Marginal Cost 100 x150= 1500

Fixed Cost = 5000

Total 20000

Marginal cost 150 x101=15150

Fixed Cost = 5000

TOTAL 20150

1

2

Additional Cost=Rs 150



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Marginal Costing

marginal costing is ascertainment of

marginal cost by differentiating between

fixed

and

variable

costs

and of the

effect

of

changes in volume

or type of output

10/2/2014Chandrakant@SOM,KIIT University

5


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Theory of Marginal Costing


At any given level of output, additional output can

normally be obtained at less than proportionate cost

per unit. This is because certain items of cost will

tend to remain fixed, irrespective of output, and onlythe aggregate of the remainder (variable cost) will

tend to rise proportionately with increase in output.

Therefore, costs should be analyzed into variable

and fixed components for meaningful decisionmaking.

This theory which recognizes the difference between

variable and fixed costs is called Marginal Costing.


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Marginal Costing


It is a technique of decision making whichinvolves:

Ascertainment of total costs

Classification of costs into fixed and variable

Use such information for analysis and decision-

making.

Also known as Variable Costing.


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Marginal Cost Sheet/Contribution

Margin Statement


Particulars Amount (Per Unit) Amount (Total)

Sales Value XXX

Less: Variable Cost

Direct Material Cost

Direct Labour Cost

Variable Factory OHand sales & Distribution

OH

XXX

XXX

XXX

Total VC XXX XXX

Contribution (Sales-VC) XXX XXX

Less: Fixed CostFixed Factory Ohs

Administration Ohs

Fixed

selling&Distribution

OHs

XXX

XXX

XXX

XXX

Profit/Loss XXX


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Cost-Volume-Profit Analysis


CVP analysis examines the behaviour of totalrevenues, total costs and operating income as

changes occur in the output level, the selling

price, the variable cost per unit or the fixed costs

of a product.

CVP analysis uses the techniques of:

Break-Even Analysis

Profit-Volume Analysis


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Concept Of Contribution


Cont r ibut ion is the difference between salesthe marginal (Variable) cost. It is called so, since

it initially contributes towards recovery of FixedCosts and thereafter towards profit of the

business. Contribution =sales-variable cost

C= S-V

Contribution = Fixed Cost+ Profit

C= F+P Therefore,

S-V = F+P


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Sales =Rs 12,000

V Cost=RS 7,000

F Cost=Rs 4,000

C=S-V=12,000-7000=5000

P=C-F

=5,000-4000

=Rs 1,000

PROFIT ?

S=C+V

=5,000+7,000

=Rs 12,000

SALES?

Sales =Rs 12,000

V Cost=RS 7,000

F Cost=Rs 4,000

F=C-P

=5,000-1,000

=Rs 4,000

V=S-C

=12,000-5000

=Rs 7,000

FIXED

COST?

VARIABLE

COST?


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ProfitVolume Ratio (PV Ratio)(Expresses the relation of Contribution to sales)


It is the relationship between Contribution and Sales

Value. It is also termed as Contribution to Sales

Ratio Or Contribution Margin.

P/V Ratio=Contribution = C/S =S-V/S

Sales

C = S XP/V Ratio

C

S = --------

P/V Ratio

Sales= Rs 10,000

V Cost=Rs 8,000

P/V Ratio=c/s

=S-V/S

=10,000-8000/10,000

=20%


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ProfitVolume Ratio (PV Ratio)


Another Method

Change in Contribution

P/V Ratio= ---------------------------------

Change in Sales

Change in profit= -----------------------

Change in Sales

1600-1000

=-------------------x 10022000-20000

600

= -----------x100=30%

2,0000

Year sales net profit

2005 20,000 1000

2006 22,000 1600


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Cost-Volume- Profit Analysis

Profit at diff. Sales Vol.

C

P/V Ratio= ----- = 3/12=25%

S

WHEN SALES=Rs 60,000

contribution=sales x p/v ratio

=60000x25%=Rs 15000

Profit =contribution-fixed cost

=15000-12000

=Rs3000

F Cost=Rs 12000S Price=Rs12 pu

V Cost =Rs 9 pu

Profit when sales are

a) Rs 60,000

b) Rs 1,00,000



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Cost- Volume- Profit Analysis

Other Uses

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------

P/V Ratio

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------

P/V Ratio

12,000+6000

a)Sales= ---------------

25%

=Rs 72,000

F Cost=Rs 12000

S Price=Rs12 pu

V Cost =Rs 9 pu

Sales if desired profit

a) Rs 6000b) Rs 15,000



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Significance of PV Ratio


PV ratio is considered to be the basic indicator ofthe profitability of the business.

The higher the PV ratio, the better it is for a

business. Incase of a Firm enjoying steady

business conditions over a period of years, the

PV ratio will also remain stable and steady.

If PV ratio is improved, it will result in better

profits.

Wh t C ld b th U f PV R ti ?


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What Could be the Uses of PV Ratio?


Break Even Point

Profit at Given Sales

Volume required to earn givenProfit

To decide the most profitable sales-mix

To measure the efficiency or to choose a most

profitable product line


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Break-Even Point (BEP)


It is the level of sales at which there is neither a

Profit nor a Loss to the Firm (Total Revenue=Total

Costs) i.e. Total Contribution=Total Fixed Costs

Basic underlying Assumptions:

All costs are fixed or variable

VC remains Constant

Total FC remains Constant

Selling Price dont change With Volume Synchronization of Prod & Sales

No Change in Productivity per workers


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Break-Even Analysis


Costs/Revenue

Output/Sales

Initially a firm

will incur fixedcosts, these do

not depend on

output or sales.

FC

As output is

generated, thefirm will incur

variable costs

these vary

directly with the

amount produced

VC

The total costs

therefore(assuming

accurate

forecasts!) is the

sum of FC+VC

TC

Total revenue is

determined by the

price charged and

the quantity sold

again this will be

determined by

expected forecast

sales initially.

The lower the

price, the lesssteep the total

revenue curve.

TR

Q1

The Break-even point

occurs where total

revenue equals totalcosts the firm, in

this example would

have to sell Q1 to

generate sufficient

revenue to cover its

costs.


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Break-Even Point (BEP)


Fixed Cost BEP (Units) = --------------- = F

Contribution PU S-V

Fixed Cost BEP (Rs ) = ----------------- x Sales

Contribution

Fixed Cost BEP (Rs) = ------------------

P/V Ratio


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Break-Even Chart


Quantity

Cost&

Revenue

sinRs

Total

Revenue

Total

Costs

Fixed

CostsActual

Sales Qty

Actual Sales

Value

BE

P

PROFITBES

LOSS

BEQMOS Qty

MOS Value


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Margin of Safety


It represents the difference between the Sales atBEP and the total Actual Sales. It can be

expressed as a % of Total Sales or in Value or in

terms of Quantity.

MOS (in Rs)= Total SalesBE Sales

= Profit / PV Ratio

MOS (In Qty)= Profit / Contribution Per Unit


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Significance of MOS


Up to BEP, the contribution earned is sufficientonly to recover the Fixed Costs. Beyond the BEP,

the contribution is called Profit (since FC are fully

recovered by then).

Profit is nothing but Contribution earned out ofMargin of Safety sales.

The size of MOS shows the strength of the

business.

A low MOS indicates that the Firm has large FC

and is more vulnerable to change in sales.

A high MOS implies that a slight fall in sales may

not affect the business very much

marginal costing and cvp

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