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Marginal Costing

This document provides an overview of marginal costing and its significance in decision making. It defines marginal cost as the additional cost of producing one more unit. Marginal costing helps in determining profit at different production levels and the break-even point. The break-even point is where total revenue equals total costs. A marginal cost statement is presented that shows sales, variable costs, contribution, fixed costs and profit. Several questions are provided as examples of calculating break-even points, margins of safety, and determining sales levels required for specific profit targets.

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Mandar Sangle
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103 views4 pages

Marginal Costing

This document provides an overview of marginal costing and its significance in decision making. It defines marginal cost as the additional cost of producing one more unit. Marginal costing helps in determining profit at different production levels and the break-even point. The break-even point is where total revenue equals total costs. A marginal cost statement is presented that shows sales, variable costs, contribution, fixed costs and profit. Several questions are provided as examples of calculating break-even points, margins of safety, and determining sales levels required for specific profit targets.

Uploaded by

Mandar Sangle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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M.M.S.

BATCH 2021-23
SEMESTER II
FINANCIAL MANAGEMENT
MARGINAL COSTING AND DECISION MAKING
Marginal Cost – The cost incurred to manufacture one more unit of a product is called
Marginal cost. Since it’s an additional cost of manufacturing one more additional unit, it
includes only variable cost as the fixed costs are not associated with the level of
manufacturing or level of activity.

Marginal Costing is a technique used to take some of the decisions, which take into account
the changes in costs due to change in the level of production. It is also called as differential
costs or incremental cost.

Marginal cost refers to increase or decrease in total costs due to changes in level of
activities. The marginal cost per unit remain constant.

SIGNIFICANCE OF MARGINAL COSTING


Marginal costing helps in profit planning. It helps in determining Break Even Point to
determine at what level the profit starts. It is useful in determine contribution and profit at
different levels. It also helps in fixation of selling price, export decision, make or buy
decision, continue or discontinue etc.

MARGINAL COST STATEMENT

SALES XXX
LESS : VARIABLE COST XXX
CONTRIBUTION XXX
LESS : FIXED COST XXX
PROFIT / (LOSS) XXX

SALES – VARIABLE COST = CONTRIBUTION


HENCE
SALES – CONTRIBUTION = VARIABLE COST
CONTRIBUTION + VARIABLE COST = SALES

CONTRIBUTION – FIXED COST = PROFIT


HENCE
FIXED COST + PROFIT = CONTRIBUTION
CONTRIBUTION – PROFIT = FIXED COST

SALES –VARIABLE COST – FIXED COST = PROFIT

VARIABLE COST PER UNIT = CHANGE IN EXPENSES / CHANGE IN OUTPUT


PROFIT VOLUME RATIO/ P/V RATIO

= CONTRIBUTION X 100
SALES

BREAK EVEN POINT = NO PROFIT OR NO LOSS POINT

BREAK EVEN POINT (RS) = FIXED COST / P/V RATIO

BREAK EVEN POINT (QTY) = FIXED COST / CONTRIBUTION PER UNIT

BREAK EVEN POINT = FIXED COST X SALES


CONTRIBUTION

MARGIN OF SAFETY = ACTUAL SALES – BREAK EVEN SALES

Q1. Calculate BEP from following :


Variable cost per unit Rs. 12
Fixed Cost Rs. 270,000
Selling price per unit Rs. 18
Also find out selling price, if BEP is to be brought down to 9,000 units.

Q2. Calculate BEP


First Year Second Year
Sales 80,000 90,000
Profit 10,000 14,000

Q3. Calculate BEP in terms of units and also calculate new BEP, if selling price is reduced by
10%
Fixed cost Variable costs
Depreciation 100,000 Material 3 per unit
Salaries 100,000 Labour 2 per unit
Selling price 10 per unit

Q4. From the following data determine i) contribution ii) break even point in units iii)
Margin of safety iv) Profit
Total fixed cost 4500
Total variable cost 7500
Total sales 15000
Units sold 5000

Q 5. Determine value of sales to be increased for the company to break even


Sales 400,000
Fixed cost 180,000
Variable cost 250,000

Q6. Fixed cost 8,000


Profit 2,000
Breakeven point 40,000
Determine actual sales

Q7. A company manufactures a single product having its marginal cost of Re. 0.75 per unit.
Fixed cost is Rs. 12,000. The market is such that upto 40,000 units can be sold at Rs. 1.50 per
unit but any additional unit can be sold at Re 1 per unit. There is a planned profit of Rs.
20,000. How many units must be made and sold ?

Q8. A Ltd maintains margin of safety of 37.5% with an overall contribution to sales ratio of
40%. Its fixed costs amount to Rs. 5 lakh.
Calculate
BEP
Total Sales
Total variable cost
Current profit
New margin of safety, if the sales volume is increased by 7.5%.

Q9. The ratio of variable cost to sales is 70%. The break even point occur at 60% of capacity
sales. Find the capacity sales when fixed cost are Rs. 90,000. Also compute profit at 75% of
the capacity sales.

Q10. From the following particulars calculate the sales required to earn a profit of Rs.
120,000
Sales 600,000
Variable cost 375,000
Fixed costs 180,000

Q 11. The following costs and sales of a manufacturing company for the first half and second
half are given below :
First half second half
Sales 24,00,000 30,00,000
Total cost 21,80,000 26,00,000
Determine
Contribution/sales ratio
Annual fixed cost
Break even point
Margin of safety as a % of sales
Q 12. Following details of sales and costs are given for first half and second half.
First half second half
Sales 24,00,000 30,00,000
Total Cost 21,80,000 26,00,000
Determine
i) Contribution/sales ratio
ii) Annual fixed cost
iii) BEP
iv) Margin of safety as a % of sales

Q 13. A single product company sells its product at Rs. 60 p u in 2020. The company
operated at a margin of safety of 40%. The fixed costs amounted to Rs. 360,000 and rariable
cost ratio to sales was 80%.
In 2021, it is estimated that the variable cost will go up by 10% and fixed cost will increase
by 5%.
Find the selling price required to be fixed in 2021 to earn same P/V ratio as in 2020.
Assuming the same selling price of Rs. 60 in 2021, find the number of units required to be
produced and sold to maintain the same amount of profit as in 2020 ?

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