Cost Analysis For Decision Making

Unit II
Cost Analysis for Mangerial

Decision
Absorption Costing
• Absorption costing is conventional technique of ascertaining cost. It is
a practice of charging all costs both variable and fixed to operations,
process or products. Under absorption costing, all production related
costs (direct or indirect, fixed or variable) are included in the unit cost.
It is also known as full costing.
• Absorption costing technique, though useful in external reporting,
has been criticised for its applicability in internal reporting.
Marginal Costing
Marginal costing is a technique of costing used for managerial
decision making based on the segregation of total costs into variable
and fixed components. Fixed costs is the ‘period’ cost and variable
cost is the ‘product’ cost. It is also known as Variable Costing
Fundamental Assumptions
1. All costs are of two types – fixed and variable
2. Either the firm is producing a single product or in case of mix
product firm, the proportion of product mix remains same at all
levels of activity.
Other Assumptions
1. There is no opening stock or closing stock, i.e, production =
sales.
2. Selling price per unit and variable cost per unit is fixed
3. Fixed cost in total will remain constant.
4. There is no change in technology, production process and
efficiency.
Contribution: The difference between sales and variable cost.

Total Contribution = Total Sales – Total Variable Cost
Contribution per unit = Selling price per unit – VC per unit
Let,
S = Total Sales s=SP p.u
V= Total Variable Cost v= VC p.u
FC= Total Fixed Cost
P/V Ratio: When contribution is expressed as a percentage of

sales, it is called P/V Ratio.
Break-even point (BEP): It is the point of activity at which total
sales is equal to total cost, i.e., there is no profit or no loss.
Alternatively, total contribution is equal to total fixed cost.
Margin of Safety (M/S): It is the difference between break

even sales and total sales.
Angle of Incidence: It is an indicator of profit earning capacity

of the firm.
BEP (in amounts) =
BEP (in units) =
Sales P/V Ratio = FC + Profit
M/S = Total Sales – Sales at BEP
M/S (in % of TS) =
Profit = M/S P/V Ratio

Total Fixed Cost = Rs 12,000
Selling price = Rs 12 per unit and Variable cost = Rs 9 per unit. Find BEP
in units and sales
Calculate break even sales from the following:

Variable cost is 60% of sales
Fixed cost is Rs 20,000
Units produced = 20,000 units
Selling price per unit = Rs 50
Profit per unit = Rs 10
Material cost = Rs 3,00,000
Labour cost = Rs 1,00,000
Overhead (50% variable) = Rs 4,00,000
Compute: i. BEP in units and in amount

ii. Sales to earn profit of Rs 3,00,000
iii. Profit if sales = 15,000 units
Particulars A B C
Selling price per unit (in Rs) ? 50 20
Variable cost as % of SP 60% ? 75%
No. of Sales (In Units) 10,000 4,000 ?
Contribution (In Rs) 20,000 80,000 ?
Fixed Cost (In Rs) 12,000 ? 1,20,000
Profit/Loss (In Rs) ? 20,000 30,000
Find the missing figure

Units produced = 10,000 units
Selling price per unit (in Rs) = Rs 40
Material cost per unit = Rs 10
Labour cost = Rs 50,000
Fixed Overhead = Rs 30,000
Variable Overhead = Rs 20,000
Compute: i. BEP (in units and in amount) and Margin of Safety (in %)
ii. BE Sales and M/S when
a. SP is reduced by 10%
b. Material cost is increased by 20% and variable OH
decreased by 5%
Differential Costing: It is a costing technique that examines changes in
the total cost and revenue by analyzing proposed alternatives. Differential
cost refers to the difference in cost (and revenue) between two or more
alternatives.
Application of MC and DC:

Product or Sales Mix
Limiting Factor
Make or Buy
Special order including foreign offer
Add or Drop Products
Operate or Shutdown
Product pricing
Sales Mix Decision
Find out optimum sales mix
X Y
Direct Material 20 18
Direct Wages 6 4
Variable Overhead is 100% of direct wages
Selling price per unit 40 30
Fixed overhead is expected to be Rs 1600
Proposed Sales Mix:
i. 100 units of X and 200 units of Y
ii. 150 units of X and 150 units of Y
iii. 200 units of X and 100 units of Y
Particulars Product A Product B Product C
Direct Materials 80 40 20
Direct Wages 5 15 10
Variable overhead 10 30 20
Selling Price per unit 140 120 90
Total Fixed Costs is Rs 10,000. Find out the optimum sales mix.
i. 200 units of A, 300 units of B, and 0 units of C.
ii. 400 units of A, 0 units of B, and 100 units of C.
iii. 0 units of A, 300 units of B, and 200 units of C.

Cost Analysis For Decision Making

Uploaded by

Copyright:

Available Formats

Cost Analysis For Decision Making

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Analysis For Decision Making

Uploaded by

Copyright:

Available Formats

Unit II

Cost Analysis for Mangerial

Contribution: The difference between sales and variable cost.

P/V Ratio: When contribution is expressed as a percentage of

Margin of Safety (M/S): It is the difference between break

Angle of Incidence: It is an indicator of profit earning capacity

BEP (in units) =

Sales P/V Ratio = FC + Profit

M/S = Total Sales – Sales at BEP

M/S (in % of TS) =

Profit = M/S P/V Ratio

Calculate break even sales from the following:

Compute: i. BEP in units and in amount

Selling price per unit (in Rs) ? 50 20

Variable cost as % of SP 60% ? 75%

No. of Sales (In Units) 10,000 4,000 ?

Contribution (In Rs) 20,000 80,000 ?

Fixed Cost (In Rs) 12,000 ? 1,20,000

Profit/Loss (In Rs) ? 20,000 30,000

Find the missing figure

Application of MC and DC:

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.