1. marginal costing

2. JOIN KHALID AZIZ ACCOUNTING(FINANACIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
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3. Why do we study Marginal Costing?

4. What do we study in Marginal Costing?
Direct Costing
Absorption Costing
Contribution
Profit Volume Analysis
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart

5. What do we study in Marginal Costing? and Why do we Study MC?
Direct Costing
Absorption Costing
Contribution
Profit Volume Analysis
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart
Management
Decision
Making

6. 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”

7. Marginal Cost “Marginal cost is amount at any given 1 2
volume of out put by which aggregate
costs are changed if volume of output
is increased or decreased by one unit” 1
Marginal Cost 100 x150= 15000
Fixed Cost =
total 2
1 Manufacture 100 radio
Variable costs Rs150 p u
Fixed cost Rs 5000
2 If Manufacture 101 radios
Marginal cost 150 x101=15150
Fixed Cost = 5000
TOTAL
additional Cost=Rs 150

8. Marginal Costing marginal cost by differentiating between
“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”

9. Marginal Costing What Could be effects of Changes In volume or
Type of output

10. Marginal Costing What Could be effects of Changes In volume or
Type of output
1 lakh units To
2 lakh units

11. Marginal Costing What Could be effects of Changes In volume or
From One
Model of
Car to
Another
What Could be effects of
Changes
In volume or
Type of output
From One
Size of
product to
another

12. Marginal Costing ---Characteristics
Fixed & Variable
Costs
Inventory
Valuation
MC Costs as
Products Costs
Contribution
Marginal Costing
&
Profit
Fixed Costs as
Period Costs
Pricing

13. Marginal Costing ---Characteristics
Segregation
Fixed & Variable
Costs
Semi-variable costs
are segregated
into fixed &
variable

14. Marginal Costing ---Characteristics
Marginal Costs as
Products Costs
Only Variable costs
are charged
to products

15. Marginal Costing ---Characteristics
Fixed Costs as
Period Costs
Fixed costs treated
Period costs
Charged to costing
P & L Account

16. Marginal Costing ---Characteristics
Inventory
Valuation
WIP & F goods are
Valued at
Marginal Cost

17. Profitability judged on
Marginal Costing ---Characteristics
Contribution
S-V=C
Profitability judged on
Contribution made

18. Marginal Costing ---Characteristics
Pricing
Pricing is based on
Contribution &
Marginal Costs

19. Marginal Costing ---Characteristics
&
Profit
A B C Total
Sales
Less VC
Contribution
Fixed Cost
Profit

20. Marginal Costing --- Sales of A Sales of B Sales of C less less less
Marginal Costing Profit
Sales of A
Sales of B
Sales of C
less
less
less
Marginal cost
Of A
Marginal cost
Of B
Marginal cost
Of C = = =
Contribution of A
Contribution of B
Contribution of C
Total
Contribution of
A,B& C
less
Profit/loss
Total Fixed
Cost =

21. Absorption Costing “Absorption cost is a total cost technique
Under which total cost i.e. fixed & variable
is charged to production.
Inventory is also valued at total cost.

22. Valuation Of stock Absorption-Marginal Costing--differences Fixed &
Measurement Of
Profitability
Valuation
Of stock
Fixed &
Variable
Costs

23. Absorption-Marginal Costing--differences
Fixed &
Variable
Costs
Absorption Costing
Both F & V Costs
Are charged
Marginal Costing
Only variable cost
FC charged to P/L

24. Valuation Of stock Total Cost
Absorption-Marginal Costing--differences
Valuation
Of stock
WIP & FS at
Marginal
Cost
Total Cost

25. C=S-V P=S-V-F Absorption-Marginal Costing--differences Measurement Of
Profitability
C=S-V
P=S-V-F

26. Comparative Cost Statement
Marginal Costing
Months
Total
Rs Rs Rs Rs
Absorption Costing
Months
Total
Rs Rs Rs Rs
(A) Sales ,00,000 1,65, ,35,000 6,00, ,00, ,65, ,35,000 6,00,000
Opening Stock , , ,05, ,73, ,08, ,08, ,35, ,52,625
Add V Cost ,20,000 1,20, ,20, ,60, ,20, ,20, , ,60,000
F Cost _ _ _ _ , , , ,05,000
Total Cost ,04,000 2,04, ,25, ,33, ,63, ,63, ,90,625 8,17,625
Less C Stock , ,05, , ,73, ,08, ,35, ,08,500 3,52,625
(B) COGS ,20, , ,41,000 3,60, ,55, ,27, ,82, ,65,000
Contribution (A-B)c , , , ,40, _ _ _ _
( D) F Cost , , ,05, _ _ _ _
Profit (C-D) , , ,000 1,35,000
(A-B)
45, , , ,35000

27. Comparative Cost Statement
Marginal Costing
Months
Total
Rs Rs Rs Rs
Absorption Costing
Months
Total
Rs Rs Rs Rs
(A)Sales ,00,000 1,65, ,35,000 6,00, ,00, ,65, ,35,000 6,00,000
Opening Stock , , ,05, ,73, ,08, ,08, ,35, ,52,625
Add V Cost ,20,000 1,20, ,20, ,60, ,20, ,20, , ,60,000
F Cost _ _ _ _ , , , ,05,000
Total Cost ,04,000 2,04, ,25, ,33, ,63, ,63, ,90,625 8,17,625
Less C Stock , ,05, , ,73, ,08, ,35, ,08,500 3,52,625
(B) COGS ,20, , ,41,000 3,60, ,55, ,27, ,82, ,65,000
Contribution (A-B)c , , , ,40, _ _ _ _
( D) F Cost , , ,05, _ _ _ _
Profit (C-D) , , ,000 1,35,000
(A-B)
45, , , ,35000

28. Comparative Cost Statement
Marginal Costing
Months
Total
Rs Rs Rs Rs
Absorption Costing
Months
Total
Rs Rs Rs Rs
(A)Sales ,00,000 1,65, ,35,000 6,00, ,00, ,65, ,35,000 6,00,000
Opening Stock , , ,05, ,73, ,08, ,08, ,35, ,52,625
Add V Cost ,20,000 1,20, ,20, ,60, ,20, ,20, , ,60,000
F Cost _ _ _ _ , , , ,05,000
Total Cost ,04,000 2,04, ,25, ,33, ,63, ,63, ,90,625 8,17,625
Less C Stock , ,05, , ,73, ,08, ,35, ,08,500 3,52,625
(B) COGS ,20, , ,41,000 3,60, ,55, ,27, ,82, ,65,000
Contribution (A-B)c , , , ,40, _ _ _ _
( D) F Cost , , ,05, _ _ _ _
Profit (C-D) , , ,000 1,35,000
(A-B)
45, , , ,35000

29. Concept Of Contribution

30. Contribution =sales-variable cost C= S-V
Contribution is the difference between sales
And the marginal (Variable) cost
Contribution =sales-variable cost
C= S-V
Contribution = Fixed Cost+ Profit
C= F+P
Therefore
S-V = F+P

31. If any 3 factors in the equation are known The 4th could be found out
Contribution is the difference between sales
And the marginal (Variable) cost
S-V=F+P
If any 3 factors in the equation are known
The 4th could be found out
P=S-V-F
P=C-F
F=C-P
S=F+P+V
V=S-C……….

32. PROFIT ? SALES? C=S-V P=C-F S=C+V =5,000+7,000 =Rs 12,000
Sales =Rs 12,000
V Cost=RS 7,000
F Cost=Rs 4,000
C=S-V
=12, =5000
P=C-F
=5,
=Rs 1,000
S=C+V
=5,000+7,000
=Rs 12,000

33. F COST? V Cost? F=C-P =5,000-1,000 =Rs 4,000 V=S-C =12,000-5000
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,
=Rs 7,000

34. Profit –Volume Ratio (PV Ratio)
(Expresses the relation of Contribution to sales)
Sales= Rs 10,000
V Cost=Rs 8,000
P/V Ratio =Contribution = C/S =S-V/S
Sales
C = S XP/V Ratio C
S =
P/V Ratio
P/V Ratio=c/s
=S-V/S
=10, /10,000
=20%

35. Profit –Volume Ratio (PV Ratio)
When PV
Ratio is
Given
C= SXPV Ratio
C= 10000X20%
=Rs 20,000

36. Profit –Volume Ratio (PV Ratio)
Another Method
Change in Contribution
P/V Ratio =
Change in Sales
Change in profit =
= x 100
600
= x100=30%
2,0000
Year sales net profit
20,
22,

37. What Could be the Uses of PV Ratio?
Break Even Point
Profit at Given Sales
Vol required to earn given Profit

38. How Improvement in PV Ratio Could be Achieved?
Increasing Selling Price
Reducing Variable Cost
Changing Sales Mix

39. Limiting Or Key Factor
a factor in short supply

40. a factor in the activities of an undertaking
Limiting Or Key Factor
a factor in the activities of an undertaking
which at a point of time or over a period
will limit the volume of out put

41. Limiting Or Key Factor Labour Materials Power Sales Capacity Machines
What Could be the Limiting Factors ?
Labour
Materials
Power
Sales
Capacity
Machines
………….

42. Cost- Volume- Profit Analysis

43. Cost- Volume- Profit Analysis
Cost Of Production
Selling Prices
Volume Produced /Sold

44. Cost- Volume- Profit Analysis
Break Even Analysis
Profit Volume Chart

45. Cost- Volume- Profit Analysis
Break Even Analysis
A point of no profit no loss
A point where revenue equals cost

46. What are BEP---assumptions
All costs are fixed or variable
VC remains Constant
Total FC remains Constant
Selling Price don’t change With Volume
Synchronisation of Prod & Sales
No Change in Productivity per workers

47. Cost- Volume- Profit Analysis
Break Even Analysis
Methods
Algebraic Method
Graphic Method

48. Cost- Volume- Profit Analysis
ALGEBRAIC
METHOD
Fixed Cost
BEP (Units) = = F
Contribution PU S-V
BEP (Rs ) = x Sales
Contribution
BEP (Rs) =
P/V Ratio

49. Cost- Volume- Profit Analysis
ALGEBRAIC
METHOD
Fixed Cost
BEP (Units) = = F
Contribution PU S-V
BEP (Rs ) = x Sales
Contribution
BEP (Rs) =
P/V Ratio
F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Find BEP

50. Cost- Volume- Profit Analysis
F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Profit when sales are
Rs 60,000
Rs 1,00,000
Other Uses
Profit at diff. Sales Vol.
Sales at Desired Profit

51. Cost- Volume- Profit Analysis
F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Profit when sales are
Rs 60,000
Rs 1,00,000
Profit at diff. Sales Vol. C
P/V Ratio= = 3/12=25% S
WHEN SALES=Rs 60,000
contribution=salesxp/vratio
=60000x25%
=Rs 15000
Profit =contribution-fixed cost =
=Rs3000

52. Cost- Volume- Profit Analysis
F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Sales if desired profit
Rs 6000
Rs 15,000
Other Uses
Sales at Desired Profit
F Cost +Desired Profit
Sales=
P/V Ratio

53. Cost- Volume- Profit Analysis
F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Sales if desired profit
Rs 6000
Rs 15,000
Sales at Desired Profit
F Cost +Desired Profit
Sales=
P/V Ratio
12,
a)Sales=
25%
=Rs 72,000

54. CVP Analysis -question
P ltd has earned a profit of Rs 1.80 lakh on sales of
Rs 30 lakhs and V Cost of Rs 21 lakhs.
work out
a)BEP
b)BEP When V Cost decreases by5%
c)BEP at present level when selling price reduced by5%

55. CVP Analysis - S-V P/V Ratio=-------- S 3000000-2100000=
=30%
Sales =VC+FC+P
= FC
FC =Rs
7,20,000
BEP=
30%
=Rs

56. CVP Analysis -question
b) When V Cost increases by 5%
New Variable Cost= %
=22,05,000
PV Ratio
=26.5%
BEP =7,20,000/ 26.5%
=Rs 27,16,981

57. CVP Analysis -question
c)When Selling Price reduced by 5%
New SP= —5%
=Rs 28,50,000
Contribution=28,50,000-21,00,000
=Rs7,50,000
PV Ratio = /
=26.32%
FC+PROFIT
Desired Sales= =
PV Ratio %
=Rs 34,19,453( appx)

58. BEP
Graphical Presentation

59. Break-Even Analysis FC Costs/Revenue Q1 Output/Sales
Initially a firm will incur fixed costs, these do not depend on output or sales. FC Q1
Output/Sales

60. Break-Even Analysis TR TR TC VC FC
The Break-even point occurs where total revenue equals total costs – the firm, in this example would have to sell Q1 to generate sufficient revenue to cover its costs.
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 less steep the total revenue curve.
As output is generated, the firm will incur variable costs – these vary directly with the amount produced
The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC
Initially a firm will incur fixed costs, these do not depend on output or sales.
Costs/Revenue TR TR TC VC FC Q1
Output/Sales

61. Break-Even Analysis TC VC FC Costs/Revenue Q1 Output/Sales TR Q2
If the firm chose to set price higher than Rs2 (say Rs3) the TR curve would be steeper – they would not have to sell as many units to break even TR VC FC Q2 Q1
Output/Sales

62. Break-Even Analysis TC VC FC Costs/Revenue Q1 Q3 Output/Sales TR)
If the firm chose to set prices lower it would need to sell more units before covering its costs TR TC VC FC Q1 Q3
Output/Sales

63. Break-Even Analysis TC VC Profit Loss FC Costs/Revenue Q1 Output/SalesTR TC
Costs/Revenue VC
Profit
Loss FC Q1
Output/Sales

64. Break-Even Analysis TC VC Margin of Safety FC Costs/Revenue
Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made TR TR TC
Costs/Revenue
A higher price would lower the break even point and the margin of safety would widen VC
Assume current sales at Q2
Margin of Safety FC Q3 Q1 Q2
Output/Sales

65. FC 1 FC Losses get bigger! TR VC Costs/Revenue Output/Sales
High initial FC. Interest on debt rises each year – FC rise therefore
Costs/Revenue
FC 1 FC
Losses get bigger! TR VC
Output/Sales

66. Break-Even Analysis Remember:
A higher price or lower price does not mean that break even will never be reached!
The BE point depends on the sales needed to generate revenue to cover costs

67. Break-Even Analysis Importance of Price Elasticity of Demand:
Higher prices might mean fewer sales to break-even
Lower prices might encourage more customers but higher volume needed before sufficient revenue generated to break-even

68. Links of BE to pricing strategies and elasticity
Break-Even Analysis
Links of BE to pricing strategies and elasticity
Penetration pricing – ‘high’ volume, ‘low’ price – more sales to break even

69. Links of BE to pricing strategies and elasticity
Break-Even Analysis
Links of BE to pricing strategies and elasticity
Market Skimming – ‘high’ price ‘low’ volumes – fewer sales to break even

70. Links of BE to pricing strategies and elasticity
Break-Even Analysis
Links of BE to pricing strategies and elasticity
Elasticity – what is likely to happen to sales when prices are increased or decreased?

71. Marginal Costing
Cost Volume Chart

72. Construction Of PV Chart
1 select a scale on Horizontal axis---sales
2 Select a scale on Vertical axis- FC & Profit
3 Plot FC & Profit
4 Diagonal line crosses sales line at BEP

73. PV Chart Information Fixed Cost =Rs 5000 Sales =Rs 20000(pu RS 20)
V Cost= Rs 10000(pu Rs10)
Find
PV Ratio, BEP, Profit?

74. Construction Of PV Chart
8000
6000
5000
4000
2000
BEP
Fixed Cost Rs
Profit Rs
Sales Rs
2000
4000
5000
6000
8000

75. Construction Of PV Chart
8000
6000
5000
4000
2000
BEP
Profit
Area
Fixed Cost Rs
Profit Rs
Sales Rs
Loss
Area
2000
4000
5000
6000
8000
Margin of Safety

76. New F Cost= 5000- 20%=Rs4000 Fixed Cost New BEP = PV Ratio = 4000/50%
Effect Of Change in Profit- 20% decrease in fixed Cost
New F Cost= %=Rs4000
Fixed Cost
New BEP = PV Ratio
= 4000/50%
=Rs 8000
New Profit=S-F-V =
=Rs 6000

77. Effect of Change in profit- 20% decrease in FC
8000
6000
5000
4000
2000
BEP
Profit
Area
Fixed Cost Rs
Profit Rs
Sales Rs
Loss
Area
2000
4000
5000
6000
8000

78. New V Cost= 10000- 10%=Rs9000 New PV Ratio=20000-9000 20000 =55%
Effect Of Change in Profit- 10% decrease in V Cost
New V Cost= %=Rs9000
New PV Ratio=
20000
Fixed Cost
New BEP = PV Ratio
= 5000/55%
=Rs 9090 Appx
New Profit=S-F-V =
=Rs 6000
=55%

79. Construction Of PV Chart
8000
6000
5000
4000
2000
New BEP
Profit
Area
Fixed Cost Rs
Profit Rs
Sales Rs
Loss
Area
2000
4000
5000
6000
8000

80. Effect Of 5% Decrease in Selling Price
8000
6000
5000
4000
2000
Profit
Area
Fixed Cost Rs
Profit Rs
Sales Rs
Loss
Area
2000
4000
5000
6000
8000
New BEP

81. ATTENTION COMMERCE STUDENTS
ACCOUNTING(FINANACIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…