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Marginal Costing

The document discusses two costing techniques: marginal costing and absorption costing. Marginal costing separates costs into fixed and variable, and assigns variable costs to products and treats fixed costs as period costs. Absorption costing assigns all manufacturing costs to products. Marginal costing is used to make decisions like pricing, product mix selection, and break-even analysis. Break-even analysis determines the sales volume needed to cover total costs. The margin of safety is sales above the break-even point.

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645 views

Marginal Costing

The document discusses two costing techniques: marginal costing and absorption costing. Marginal costing separates costs into fixed and variable, and assigns variable costs to products and treats fixed costs as period costs. Absorption costing assigns all manufacturing costs to products. Marginal costing is used to make decisions like pricing, product mix selection, and break-even analysis. Break-even analysis determines the sales volume needed to cover total costs. The margin of safety is sales above the break-even point.

Uploaded by

bellado
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Marginal Costing and

Absorption Costing
There are mainly two techniques of
determining cost and profit:-
Marginal Costing
Absorption Costing
These are not methods of costing like job
costing or process costing.
Marginal Costing:
CIMA defines marginal costing as “the
accounting system in which variable costs are
charged to the cost units and fixed costs of
the period are written-off in full against the
aggregate contribution.
ABSORPTION COSTING
 Absorption costing is a costing technique,
which does not recognise the difference
between fixed costs and variable costs, all the
manufacturing costs are absorbed in the cost
of the products produced.
Absorption costing is a traditional approach
and is also known as ‘Conventional Costing’.
Characteristics of Marginal
Costing
Segregation of Costs into fixed and variable
elements.
Marginal Costs as products costs.
Fixed costs as period costs.
Valuation of inventory(on the basis of variable
manufacturing cost only)
Contribution (sales – variable cost ).
Variable Costs
Variable costs are costs such as raw
materials, direct labor, direct expenses and
energy, commission on sales units etc, that
vary or change directly with the amount of
product produced and sold.
Differences between
Marginal Costing and
Absorption Costing
Marginal costing differs from absorption
costing on the ground of difference in
valuation of closing stock. Marginal costing
techniques values closing stock at marginal
cost where as it is valued at total cost of
production in absorption costing techniques.
Uses of Marginal Costing in
Decision making:
 Helps in Fixation of selling price
 Helps in selecting a suitable produce mix for
maximum profit.
 Determining Break – Even point.
 Choosing from the available alternative
method of production the one which gives
highest contribution or contribution per
limiting factor.
 Make or buy decision on the basis of higher
contribution
 Taking a decision as regard to adding a new
Decisions Based on
Marginal Costing
To plan their operations, manufacturing firms
must decide:
How many units they expect to sell
How many units to produce
How much to spend to produce and sell these
units
At what price they must sell the units to make
the profit they want
To make these decisions, firms may calculate
the break-even point.
Break-Even Point
The break-even point is the point at which
income from sales equals the total cost of
producing and selling goods.
It is the point at which the business will
neither make a profit nor suffer a loss.
When sales exceed the break-even point,
there is a profit.
When sales are less than the break-even
point, there is a loss.
Finding the Break-Even
Point
To find the break-even point, you need to
know three things:
Fixed costs for manufacturing the product
Variable costs for manufacturing each unit of
the product
Expected selling price of each unit of the
product
Break-Even Point in Rs.
= Break-Even Point in Units × Sales Price per Unit

or
Fixed cost
P/V ratio
Break Even point in units
Break Even point in units

= Fixed Cost
Contribution per unit
Marginal cost equation
S–V=F±P
Where S = Sales V = Variable cost
F = Fixed cost P = profit
Break-Even (or cost volume
profit) Analysis
It establishes the relationship of costs, volume
and profit in broader sense break even
analysis is one which determines the profit
earned at any point or level of output. In
narrow sense it is to determine the break
even point (no-profit, no-loss) from where
profits accrue.
Contribution and P/V
ratio
Contribution
- The amount contributed towards fixed
expenses and profit i.e., sales less variable
cost.
Profit / Volume ration (P/V Ratio)
- Studies the profitability of operations of
a business and establishes the relationship
between contribution and sales.
To improve the P/V
- Reduce variable costs
- Increase the selling price
- Produce products having higher P/V ratio
Margin of Safety
It is the level of sale over and above the break
even point.
MoS = Sales - BEP
decrease in selling price
results in
 Reduction in sales volume
 Reduction in contribution
 Reduction in P/V ratio
 Increase in break-even sales volume
 Shortening of margin of safety
List of Formulae:

1) Variable expenses per unit


= change in cost
change in output
2) Marginal cost equation
Sales – Variable Cost = Fixed cost ± profit /loss
3) Contribution = Sales – variable cost.
4) P/V ratio = contribution ( x 100 if or
percentage)
sales
Continue
5) Variable Cost = Sales x (1- P/V ratio)
6) Profit = (Sales x P/V ratio) – Fixed cost
7) Sales to earn desired profit =
Fixed expenses + Desired profit
Selling price per unit – Variable cost per unit
Continue
10) Margin of safety = Actual sales – Break
Even sales
or profit
P/V ratio
11) P/V ratio =
change in profit ( x 100 for %)
change in sales
Break Even Chart:

It provides pictorial view of the relationship


between costs, volume & profit, it shows the
Break even points and also indicates the
estimated profit / loss at various levels of
output. Break – Even chart is a point at
which the total cost line and the total sales
line intersect.
Profit volume chart:
It represent profit volume relationship, it
shows profit/loss at different volumes of
sales

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