1. PRESENTATION ON MARGINAL COSTING & ABSORPTION COSTING

2. GROUP MEMBERS ANKIT KUMAR RANKA(06A) HARISH KUMAR(21B)
VIKAS AGRAWAL(59B)

3. MARGINAL
COSTING

4. Meaning….
Marginal cost is amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit.
It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost.

5. Features of Marginal costing
1.Cost Classification
The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm following the marginal costing technique
2. Stock/Inventory Valuation
Under marginal costing, inventory/stock for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method
3. Marginal Contribution
Marginal costing technique makes use of marginal contribution for marking various decisions. Marginal contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments

6. Advantages The technique is less complicated and free from confusion.
Under this technique net profit is not effected by the changes in production level or changes in stock volume; in fact profit is directly related to sales.
Reports based on this technique provide information based on sales rather than production conveying real estate of efficiency.
It helps in profit planning, particularly of short term nature.
Most significant use of this technique is in the area of price-policy and its determination.

7. Disadvantages
It lays too much emphasis on selling function,and as such production function has been considered to be less significant.
Valuation of stock only at Marginal cost may amount to under-valuation from the financial manager’s view point and this may have working capital problem.
Not suitable for external reporting,viz., for tax authorities where marginal income is not considered to be taxable profit.
This technique does not attach due importance to time factor.

8. Contribution
Contribution is the difference between sales and variable cost.
Contribution = Sales - Variable Cost
Contribution = Profit + Fixed Cost

9. Contribution
Contribution is the difference between sales and variable cost.
Contribution = Sales - Variable Cost
Contribution = Profit + Fixed Cost

10. Example… Sales 50000 Variable cost 20000 Fixed cost 20000
Contribution ???

11. Solution… Sales = 50000 Variable cost = 20000
Contribution = sales-variable cost =
= 30000
Total fixed cost = 20000
Profit = contribution-total fixed cost =
= 10000
Contribution = total fixed cost + profit =
= 30000

12. Break-even analysis

13. Definition………
Breakeven analysis is the study of the relationship between selling prices, sales volumes, fixed costs, variable costs and profits at various levels of activity.
Breakeven analysis is also known as cost-volume profit analysis.

14. Application………
Breakeven analysis can be used to determine a company’s breakeven point (BEP).
Breakeven point is a level of activity at which the total revenue is equal to the total costs.
At this level, the company makes no profit.

15. Assumption of breakeven point analysis
Relevant range
The relevant range is the range of an activity
over which the fixed cost will remain fixed in
total and the variable cost per unit will remain constant.
Fixed cost :Total fixed cost are assumed to be
constant in total.
Variable cost : Total variable cost will increase with increasing number of units produced
Relevant range
The relevant range is the range of an activity
over which the fixed cost will remain fixed in
total and the variable cost per unit will
remain constant
Fixed cost
Total fixed cost are assumed to be constant
in total
Variable cost
Total variable cost will increase with
increasing number of units produced

16. BEP Calculation – an Example
Assume selling price is Rs.35 per unit.
Variable expense is Rs.21 per unit.
Fixed cost is Rs.7,000.
What is the breakeven point?

17. Solution… Break Even Point(In units) = =7000/14 =500 units
BEP(in Sales)= TFC/PV ratio
=7000/40%
=17500
P/v ratio=contribution/sales*100
=14/35*100
=40%

18. Margin of Safety (MOS) Margin of Safety is the difference between
the expected level of sales and the BEP.
The larger the margin of safety , the more
likely it is that a profit will be made.
MOS= Projected sales – BEP
Profit= MOS X Contribution per unit

19. Example… Selling price = 50000 Variable cost 10000 Fixed cost 20000
Margin of safety ???

20. Solution… Contribution/unit = sales-variable cost
BEP(in units) =TFC/contribution/unit
BEP(in sales) =TFC/pv ratio
P/V ratio =contribution/sales*100
Mos =sales-BEP(sales)

21. Solution… Sales 50000(50/unit) (-) variable cost 10000(10/unit)
Contribution (40/unit)
Fixed Cost
Profit
Margin of safety = sales-Break even point
Break Even Point(in rs.) = TFC/PV ratio
= 20000/
P/V ratio = contribution/sales*100
= 40/50*100=80%
BEP = 20000/80%=25000
MOS = =25000

22. Solution… Sales 50000(50/unit) (-) variable cost 10000(10/unit)
Contribution (40/unit)
Fixed Cost
Profit
Margin of safety = sales-Break even point
Break Even Point(in rs.) = TFC/PV ratio
=20000/
P/V ratio = contribution/sales*100
= 40/50*100=80%
BEP = 20000/80%=25000
MOS =
= 25000

23. Profit/Volume Ratio : P/V Ratio =
Profit volume ratio is the ratio of contribution denoting the difference between sales and variable cost. Since in the short term fixed cost does not change, Profit/volume ratio also measures the rate of change of profit due to change in the sales.
P/V Ratio =

24. EXAMPLE… Sales = 50000 Variable cost = 20000 Fixed cost = 20000
Profit volume Ratio ???

25. Solution… Profit Volume Ratio = = contribution/sales*100
=20000/50000*100
=40%

26. PROFORMA Amt. Amt. Sales X Less: Variable cost of Goods sold X
Variable non- manufacturing exp.
Variable selling expenses X
Variable admin. expenses X
Other variable expenses X X
Total contribution expenses X
Less: Expenses
Fixed selling expenses X
Fixed admin. expenses X
Other fixed expenses X X
Net Profit X

27. Example…. A B C SALES (P.U @100) 1000 800 1100 Variable COGS (RS/UNIT)35
Variable selling OH (in rs)
4000
3200
4400
Find out profit of RANKA LTD if the fixed cost
is Rs for all the plants

28. A B C
Sales
Less: Variable cost of good
sold
Product contribution margin
Less: Variable selling O/H
Total contribution margin
Less: Fixed Expenses
Fixed factory overhead
Net profit

29. Absorption costing

30. MEANING………. Absorption cost is a total cost technique
Under which total cost i.e. fixed & variable
is charged to production.
Includes direct materials, direct labor,
variable factory overhead, and fixed factory
overhead as part of total product cost.

31. Importance of Absorption costing
All the overheads are included when calculating the cost of producing particular items
Fixed costs are brought into the calculations on the assumption that they must be recovered
All the overheads are absorbed into cost units but each aspects of overheads is absorbed separately by cost centres of an appropriate basis -i.e. not a blanket approach
Absorption costing is used to calculate profit and to calculate stock valuation for financial statement.

32. What is a Cost Centre?
“Any unit of Cost Accounting selected with a view to accumulating all cost under that unit. The unit may be a product, a service, division, department, section, a group of plant and machinery , a group of employees or a combination of several units.”

33. Types of Cost Centres
Again Cost centers may be divided into broad types :
Production Cost Centres are those which are engaged in production like Machine shop, Welding shop, Assembly shop etc.
Service Cost centers are for rendering service to production cost centre like Power house, Maintenance, Stores, Purchase office etc.

34. Allocation & Apportionment
Cost Allocation is possible when we can identify a cost as specifically attributable to a particular cost centre.
Cost Apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. In this case the cost is shared out over two or more cost centres according to the estimated benefit received by each cost centre. As far as possible the basis of apportionment is selected to reflect this benefit received

35. Allocate overhead costs that are directly incurred by particular cost centre.
Allocation is the process of charging costs that is fully associated with a particular cost centre.
Examples: machines dedicated to the production of a particular product, building whose sole use is the production of a particular product
In both cases there is no need to divide up the costs between products since the facility is directly linked to the product
But if an overhead cannot be allocated it must be apportioned
Allocate

36. Bases for Allocation Area Occupied- Rent, Rates & Taxes etc.
Capital value of Assets- Repairs, Insurance, Depriciation.
Kwh / HP of Machines- Power.
Number of Employees- Supervision,Canteen, Time-Keeping etc.
Light Points- Electricity.
Insurance- the book value of an assets
Material handling- Weight or size

37. Example Of Allocation Particulars A B C D E
Vikas Ltd has 5 Departments of which A,B,C are Production Departments, while X & Y are Service Departments.
Particulars A B C D E
Floor area
No. of Employees
HP of Machines
Value of Plant
No. of Light Points
180 20
600
240000 30
120 15
400
200000
100 12
500
160000 70 8 -
100000 10 5
50000
Distribute the following Costs to various Departments :
Rent,Rates & Taxes = Rs.5000, Repairs to Plant = Rs.7500,Power = Rs.4500,
Supervision = Rs.6000, Lighting = Rs.800

38. Solution Items of cost Basis Total A B C D E Rent Repairs Power
Supervision
Lighting
Floor Area
(18:12:10:7:3)
Value (10:6:4:2:1)
HP (6:4:5)
Employees
(20:15:12:8:5)
No.of Light points
(6:4:3:2:1)
5000
7500
4500
6000
800
23800
1800
2400
2000
300
8300
1200
1500
200
6100
1000
1600
150
5450
700 -
100
2600
500 50
1350

39. Example Of Apportionment
Harish Ltd has three Manufacturing Departments (A, B, & C) & one Service Department (S). Calculate the Statement showing Apportionment of expenses :
Expenses
Total S A B C
Power
Supervisors’ Salary
Rent
Welfare
Others
Sup. Salary
No. of workers
Floor Area
Services by S to A, B & C
1100
2000
500
600
1200
5400
240 -
200
20% 10
30% 30
50%
300
400 40
800
360 20

40. Solution Items of cost Basis Total A B C D E Rent Repairs Power
Supervision
Lighting
Floor Area
(18:12:10:7:3)
Value (10:6:4:2:1)
HP (6:4:5)
Employees
(20:15:12:8:5)
No.of Light points
(6:4:3:2:1)
5000
7500
4500
6000
800
23800
1800
2400
2000
300
8300
1200
1500
200
6100
1000
1600
150
5450
700 -
100
2600
500 50
1350

41. Solution Expenses Basis of Apportionment Total S A B C Power
Supervisors’
Salary
Rent
Welfare
Others
Expenses of S
Actual
Service rendered
(2:3:3:2)
Floor Area (5:6:8:6)
No. of Workers(1:3:4:2)
Ratio Given (5:3:2)
1100
2000
500
600
1200
5400 -
240
400
100 60
200
1000
(1000)
Nil
120
180
1300
1800
300
160
1700
360
1400
1600

42. ABSORPTION COSTING PRO-FORMA
Sales Revenue xxxxx
Less Absorption Cost of Sales (xxx)
Opening Stock xxxx
Add Production Cost xxxx
Total Production Cost xxxx
Less Closing Stock (xxx)
Absorption Cost of Production xxxx
Add Selling, Admin & Distribution Cost ` xxxx
Absorption Cost of Sales (xxxx)
Un-Adjusted Profit xxxxx
Fixed Production O/H absorbed xxxx
Fixed Production O/H incurred (xxxx)
(Under)/Over Absorption xxxxx
Adjusted Profit xxxxx

43. EXAMPLE Ranka Ltd, an organization that produces a product that
sells for Rs.60 per unit.Variable production costs are
Rs.35 per unit and the fixed production costs of
Rs.30,000 per period are absorbed on the basis of the
normal capacity of 5,000 units per period.Fixed
administration, selling and distribution overheads are
Rs.19,000 per period. There was no opening inventory
for the latest period.Required Calculate the profit
on 5,000 units, 6,000 units and 7,000 units,

44. solution
Fixed production cost per unit = Rs.30,000/5,000 = Rs.6 P.U
Full production cost per unit = Rs.35 + Rs.6 = Rs.41 per unit
particulars
5000
6000
7000
Sales
Production Cost
(-)closing Stock
(-)over absorbed FC
Cost of sales
GrossProfit
(-) admin cost
Net Profit
205K
Nil
300000
205000
95000
19000
76000
246K
41K 6K
199000
101000
82000
287K
82K
12K
193000
107000
88000

45. COST SHEET Direct Material Cost xxx Direct Labour Cost xxx
Direct Expenses xxx
PRIME COST XXX
Add: Factory Overhead xxx
FACTORY COST XXX
Add: Administrative overhead xxx
COST OF PRODUCTION XXX
Add: Selling & Distribution cost xxx
COST OF SALES XXX
Add: Profit xxx
SELES XXX

46. Prepare cost sheet of RANKA ltd
Direct mat K
Direct labor K
Factory rent K
Office rent K
Show room rent K
Power K
Light 5K
Sundry factory exp 15K
Indirect wages K
Advertisements K
Sales commission 25K
Office salaries K
Sales salaries K
Carriage outward K
Delivery van exp K
Dep of plant k
Direct factory exp k
Crane exp K
Factroy supervision 40k
Dep on office
equipment K
sales K

47. Classification of costs by functions
Costs should be classified according to the major
functions for which the elements are used into the
following four major functions
COST
ADMINISTRATION
RESEARCH &
DEVELOPMENT
PRODUCTION
SELLING &
DISTRIBUTION

48. Direct material consumed = Opening Stock of DM+ Purchase of DM-Closing Stock of DM
Factory cost = Prime cost +Factory O/H + Opening WIP - Closing WIP
Cost of production of goods sold = cost of production +opening stock of FG – Closing stock of FG

49. Comparison between “Marginal & Absorption Costing”

50. Diff b/w Absorption & Marginal costing
1) It is a total cost technique I.e. both variable and fixed costs are charged to products, processes or operations.
2) In spite of best possible forecast and equitable basis of apportionment /allocation of fixed costs, under or over recovery of fixed overheads generally arises.
3) Managerial decisions under this costing technique are based on profit I.e. excess of sales value over total costs, which may at times lead to erroneous decisions.
Here only variable costs are charged to product, processes or operations. Fixed costs are charged to the profit statement.
Since fixed overheads are not included in the cost of production, therefore the question of their under/ over recovery does not arise.
Here decisions are made on the basis of contribution I.e. excess of sales price over variable costs. This basis of decision making results in optimum profitability.

54. Absorption Costing
Cost
Manufacturing cost
Non-manufacturing cost
Direct
Materials
Direct
Labour
Overheads
Period cost
Finished goods
Cost of goods sold
Profit and loss account
Marginal Costing
Cost
Manufacturing cost
Non-manufacturing cost
Direct
Materials
Direct
Labour
Variable
Overheads
Fixed
overhead
Period cost
Finished goods
Cost of goods sold
Profit and loss account

55. THANK YOU