INDEXSR.NOTOPICSIGN

1. Marginal Costing.

2.Meaning.

3.Features of Marginal Costing.

4.Advantages of Marginal Costing.

5.Disadvantages of Marginal Costing.

6.Formulas of Marginal Costing.

7.Absorption Costing.

8.Meaning.

9.Advantages of Absorption Costing.

10.Disadvantages of Absorption Costing.

11.Marginal Costing V/S Absorption Costing.

12.Break Even Analysis.

13.Assumption and Limitations Break-Even Analysis.

14.Cost-Volume-Profit analysis.

15.Contribution Analysis.

16.Conclusion.

17.Bibliography.

CHAPTER 1Marginal Costing The increase or decrease in thetotal cost of aproduction runformaking one additionalunit of an item. It is computed in situations where thebreakeven point has been reached: thefixed costs have already been absorbed by the alreadyproduceditems and only the direct (variable) costs have to be accounted for. Marginal costs arevariable costs consisting oflabor andmaterial costs,plus anestimated portion of fixed costs (such asadministration overheadsandselling expenses) Incompanies whereaverage costs are fairly constant, marginalcost is usually equal to average cost. However, inindustries that require heavycapital investment (automobile plants, airlines, mines) and havehigh average costs, it is comparatively verylow. Theconcept of marginal cost is critically important in resourceallocation because, foroptimum results,management must concentrate itsresources where theexcess ofmarginal revenue over the marginal cost is maximum. Alsocalled choice cost,differential cost, or incremental cost. Like process costing or job costing, marginal costing is not a distinct method of ascertainment of cost but is a technique which applies existing methods in a particular manner so that the relationship between profit & the volume of output can be clearly brought out. Marginal costing ascertains marginal or variable costs & the effect on profit, of the changes in volume or type of output, by differentiating between variable costs & fixed costs. To any type of costing such as historical, standard, process or job; the marginal costing technique may be applied. Under the process of marginal costing, from the cost components, fixed costs are excluded. The difference which arises between the variable costs incurred for activities & the revenue earned from those activities is defined as the gross margin or contribution. It may relate to total sales or may relate to one unit.

The calculation of contribution for a specific product or group of products is done as follows:Sales Revenue XXX Less Variable cost of production XXXContribution XXF or the business as a whole, contributions earned by specific products or group of products, are added so as to calculate the pool of total contribution. The fixed costs of the business are paid from this pool & then the part of the total contribution which remains becomes the profit of the business as a whole. A typical format for marginal costing statement is as below:Product types or departments A B C Total Sales Revenue X X X XLess Variable cost of production X X X XContribution X X X XLess: Fixed Costs XXTotal Profit XX

Under marginal costing, for the calculation of profits for individual products or departments, no attempt is made- only calculation of individual contributions is done. The fixed cost does not allocated to or gets absorbed by the individual products or departments. Thus, accounting techniques relating to the treatment of fixed costs will not influence the decisions which are based on marginal costing system.

Examples of typical problems which require executive decisions are:a. At a lower price should a particular order be accepted or declined?b. Should purchase of a particular component be made from an outside supplier or manufactured within the factory?c. Concentration should be given on which products?d. By which profit-mix, profit will be maximized?e. What should be the effect on the business when an existing department is being closed or a new department is being opened?f. To make up for wage rise, what should be the additional volume of business?g. How by change in sales volumes or sales prices, the level of profit of business be influenced?

CHAPTER 2Meaning The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs, it is comparatively very low. The concept of marginal cost is critically important in resource allocation because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost. Marginal costing distinguishes between fixed costs and variable costs as conventionally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads. Marginal costing is formally defined as: the accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making. The term contribution mentioned in the formal definition is the term given to the difference between Sales and Marginal cost. Thus:

MARGINAL COST = VARIABLE COST DIRECT LABOUR+ DIRECT MATERIAL+DIRECT EXPENSE+VARIABLE OVERHEADS

CONTRIBUTION = SALES - MARGINAL COST The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context.Note: Alternative names for marginal costing are the contribution approach and direct costing In this lesson, we will study marginal costing as a technique quite distinct from absorption costing. Marginal cost is the cost to create one more unit of a product. In a highly automated environment, this incremental change is likely to be solely the material cost of a product; in a less automated environment, it may also include the cost of the labor needed to create the product. For example, it costs $20,000 to produce 50 units of a green widget, with most of the cost associated incurred during the setup of the production equipment at the beginning of the production run. It costs $20,100 to produce 51 units of the green widget, which means that the marginal cost of the next unit of production is $100. The average cost of producing 51 units of the green widget is $394 ($20,100 divided by 51 units).CHAPTER 3Features of Marginal Costing Classification of costs into fixed costs & variable costs is done under marginal costing system. Also semi-fixed or semi-variable cots get further classified into fixed & variable elements. To the product, only variable elements of cost, which constitute marginal cost, are attached. After the marginal cost & marginal contribution are taken into consideration; price is fixed. From the total contribution for any period, fixed cost for the period are deducted. The profitability of a department or product is decided by the marginal contribution. At variable production cost, the valuation of work-in-progress & finished product is made. But the main features of marginal costing are as follows: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.

CHAPTER 4Advantages of Marginal Costing Components and spare parts may be made in the factory instead of buying from the market. In such cases, the marginal cost of manufacturing the components or spare parts should be compared with market price while taking decision to make or buy. If marginal cost is lower than the market price, it is more profitable to make than purchasing from market. Additional or specific fixed cost may be a relevant cost. Following are the advantages of Marginal Costing Variable cost remains constant per unit of output and fixed costs remain constant in total during short period. Thus control over costs becomes more effective and easier. Standards can be set for variable costs, while Budgets can be established for fixed cost in order to exercise full control over the total activities. Marginal costing brings out contribution or profit margin per unit of output, and clearly brings out the effect of change in activity. It facilitates making policy decisions in a number of management problems, such as determining profitability of products, introducing a new product, discontinuing a product, fixing selling price, deciding whether to make or buy, utilizing spare capacity, profit-planning, etc. The distinction between product cost and period cost helps easy understanding of marginal cost statements. Closing inventory of work-in-progress and finished goods are valued at marginal or variable cost only. This method leads to greater accuracy in arriving at profit as it eliminates any carryover of fixed costs of the previous period through inventory valuation. As a corollary to above, since fixed costs do not enter into product-cost, it eliminates the process of allocating, apportioning and absorbing overheads and adjusting under and over-absorbed overheads. Therefore, the method is simpler to operate. As there is involvement of computation of variable costs only in marginal costing, it is easy to understand & operate the same. Among different products or departments, arbitrary apportionment of fixed costs is avoided & the under-recovery or over-recovery problems are eliminated. Any attempt of measurement of relative profitability of different products or different departments becomes complicated due to the arbitrary apportionment of fixed costs. Analysis of contribution, break even charts & analysis of cost-volume-profit-analysis are resulted out of a marginal costing system; for making short term decisions all of these are important. More uniform & realistic figures are resulted out of marginal costing system because fixed overhead costs are excluded from valuation of stock & work-in-progress. Apportionment of responsibility of control can be more easily done since to each level of management only variable costs are presented over which they have control. The effects of their decisions can be more readily seen by all levels of management-sometimes even before taking of an action. Marginal costing is simple to understand. By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided. It prevents the illogical carry forward in stock valuation of some proportion of current years fixed overhead. The effects of alternative sales or production policies can be more readily available and assessed, and decisions taken would yield the maximum return to business. It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate. Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost. It is useful to various levels of management. It helps in short-term profit planning by breakeven and profitability analysis, both in terms of quantity and graphs. Comparative profitability and performance between two or more products and divisions can easily be assessed and brought to the notice of management for decision making.

Main advantages of Marginal Costing are as follows: Cost Control: Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost useful to the various levels of management. Simplicity: Marginal Costing is simple to understand and operate; it can be combined with other forms of costing, such as, budgetary costing, standard costing without much difficulty. Elimination of varying charge per unit: In marginal Costing fixed overheads are not charged to the cost of production due to this the effect of varying charges per unit is avoided. Short-Term Profit Planning: It helps in short-term profit planning by break-even charts and profit graphs. Comparative profitability can be easily accessed and brought to the notice of the management for decision-making. Prevents Illogical Carry forwards: It prevents the illogical carry-forwards in stock-valuation of some proportion of current years fixed overhead. Accurate Overhead Recovery Rate: It eliminates large balances left in overhead control accounts, which indicate the difficulty of ascertaining an accurate overhead recovery rate. Maximum return to the business: The effects of alternative sales or production policies can be more readily appreciated and assessed, and decisions taken will yield the maximum return to the business.

CHAPTER 5Disadvantages of Marginal Costing The technique is based on the segregation of costs into fixed and variable ones, while many expenses are neither totally fixed nor totally variable at various levels of activity. Thus, classifying all expenses into two categories of either fixed or variable is a difficult task. The assumptions regarding behavior of costs, such as, fixed cost remains static, are often not realistic. Contribution is not the only index to take decisions. For example, where fixed cost is very high, selling price should not be fixed on the basis of contribution alone without considering other key factors such as capital employed. Marginal cost, if confused with total cost while fixing selling price may lead to a disaster. Inventory valuation at marginal cost will understate profits and may not be acceptable by tax-authorities. Any claim based on cost will be very low, as it will not have a share of fixed cost. The process of separating semi-variable or semi-fixed costs into their variable & fixed elements is an arbitrary exercise which at different levels of output may be subject to fluctuations & inaccuracy. Consequently, a substantial degree of error may be contained in the basic cost information which is used in decision making process. When selling prices are based on marginal costs, great care need to be exercised, as in the long run, all fixed overheads should be covered by the prices & a reasonable margin over& above the total costs should be left. Under many circumstances, the deduction of contribution made by some production units may be difficult. Thereby the effectiveness of the system is lost. Since on the basis of variable costs only the valuation of stock of finished goods & work-in-progress is done, they are always understated. As result profit is also understated. More effective utilization of present resources or by expansion of resources or by mechanization, increased production & sales may be effected. The disclosure of this fact cannot be done by marginal costing. The separation of costs into fixed and variable is difficult and sometimes gives misleading results. Normal costing systems also apply overhead under normal operating volume and this shows that no advantage is gained by marginal costing. Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from inventories affect profit, and true and fair view of financial affairs of an organization may not be clearly transparent. Volume variance in standard costing also discloses the effect of fluctuating output on fixed overhead. Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories. Application of fixed overhead depends on estimates and not on the actual and as such there may be under or over absorption of the same. Control affected by means of budgetary control is also accepted by many. In order to know the net profit, we should not be satisfied with contribution and hence, fixed overhead is also a valuable item. A system which ignores fixed costs is less effective since a major portion of fixed cost is not taken care of under marginal costing. In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the assumptions underlying the theory of marginal costing sometimes becomes unrealistic. For long term profit planning, absorption costing is the only answer. Main Disadvantages of Marginal Costing are as follows: Misleading Results: It is very difficult to segregate all costs into fixed and variable costs very clearly, since all costs are variable in the long run. Hence such segregation sometimes may give misleading results. Distorted Picture of Profits: The closing stock consists of variable cost only and ignores fixed costs. This gives Distorted Picture of Profits. Avoids Semi-Variable Costs: Semi-Variable costs are not considered in the analysis. Problem of Recovery of Overheads: There is problem of under or over-recovery of overheads, since variable costs are apportioned on estimated basis and not on the actual.CHAPTER 6Formulas of Marginal CostingMarginal cost = prime cost + total variable overheadsOrMarginal cost = total variable cost.Contribution = selling price variable (marginal) costOr Contribution = fixed cost + profit (or-loss)OrContribution fixed cost = profit (or loss)Thus,Sales = Variable cost + fixed cost + profit (or loss)Sales = Variable cost = fixed cost + profit (or loss)P/V = contribution/sales = S/COr = [Fixed Costs + Profit/sales] = [F+P/S]Or = [Sales-Variable Cost/Sales] = [S-V/S]Break-even Point (units) = Total fixed costs/Contribution per unit [F/C per unit]Break-even Sales = Total Fixed Costs x selling price per unit / contribution per unit[F/C*S]Fixed Cost/P/V Ratio [F/P/V]

CHAPTER 7Absorption Costing The objective of absorption costing is to include in the total cost of a product an appropriate share of the organizations total overheads. Overhead is the cost incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and fully to the product, service or department. Overheads are actually the total of the following:- Indirect materials Indirect labour Indirect expensesIn cost accounting there are two schools of thoughts as to the correct method of dealing with overheads:- Absorption costing Marginal costing. An appropriate share is generally taken to mean an amount which reflects the amount of time and effort which has gone into producing a unit or completing a job. The theoretical justification for using absorption costing is that all production overhead are incurred in production of output so each unit of the product receives some benefits from these cost. Therefore each unit of output should be charged with some of the overhead costs. Practical reasons for using absorption costing- Inventory valuations Inventory in hand must be valued for two reasons For the closing inventory figure in the statement of financial position For the cost of sales figure in the statement of comprehensive income In absorption costing, closing inventory is valued at fully absorbed factory costs.

Practical reasons for using absorption costing- Pricing decisions Many companies attempt to fix selling prices by calculating the full cost of production or sales of each product, and then adding a margin for profit. Without using absorption costing, a full cost is difficult to ascertain. Practical reasons for using absorption costing- Establishing profitability of different products If a company sells more than one product, it will be difficult to judge how profitable each individual product is, unless overhead costs are shared on a fair basis and charged to the cost of sales of each product

Absorption of overheads Absorption of overheads is charging of overheads from cost centres to products or services by means of absorption rates for each cost center which is calculated as follows:Overhead absorption Rate = total overheads of cost centre / total quantum of base The base (denominator) is selected on the basis of type of the cost centre and its contribution to the products or services, for example, machine hours, labour hours, quantity produced etc.

Overhead absorption

Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit, job or batch costs. Overhead absorption is sometimes known as overhead recovery. Therefore having allocated and/or apportioned all overheads, the next stage is to add them to, or absorb them into, cost units. Overheads are usually added to costs units using a predetermined overhead absorption rate, which is calculated using figures from the budget.

Calculation of overhead absorption rate. Estimate the overhead likely to be incurred during the period. Estimate the activity level for the period. Divide the estimated overhead by the budgeted activity level. Absorb the overhead into the cost unit by applying the calculated absorption rate.Choosing the appropriate absorption base A percentage of direct materials cost. A percentage of direct labour cost. A percentage of prime cost. A rate per machine hour. A rate per direct labour hour. A rate per unit. A percentage of factory cost (for admin overhead). A percentage of sales or factory cost (for selling and distribution overhead)

Blanket absorption rate and departmental absorption rate A blanket overhead absorption rate is an absorption rate used throughout a factory and for all jobs and units of output irrespective of the department in which they are produced If a separate absorption rate is used for each department, charging of overheads will be fair and the full cost of production of items will represent the amount of effort and resources put in making them Blanket overhead rates are not appropriate in the following circumstances:---There is more than one department. --Jobs do not spend an equal amount of time in each department

Over and under absorption of overheads The rate of overhead absorption is based on estimates (of both numerator and denominator) and it is quite likely that either one or both of the estimates will nit agree with what actually occurs--Over absorption means that the overheads charged to the cost of sales is more than the overheads actually incurred.--Under absorption means that insufficient overheads have been included in the cost of salesThe reasons for over/under absorbed overheads. The overhead absorption rate is predetermined from budget estimates of overhead cost and the expected volume of activity. Over or under recovery of overhead will occur in the following circumstances:--Actual overhead costs are different from budgeted overhead.--The actual activity level is different from the budgeted activity level.--Actual overhead costs and actual activity level differ from the budgeted costs and levels.

CHAPTER 8Meaning A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting. Absorption costing is also known as full absorption costing. Some of the direct costs associated with manufacturing a product include wages for workers physically manufacturing a product, the raw materials used in producing a product, and all of the overhead costs, such as all utility costs, used in producing a good. Absorption costing includes anything that is a direct cost in producing a good as the cost base. This is contrasted with variable costing, in which fixed manufacturing costs are not absorbed by the product. Advocates promote absorption costing because fixed manufacturing costs provide future benefits. It is a costing technique where all normal costs whether it is variable or fixed costs are charged to cost units produced. Unlike marginal costing which take the fixed cost as period cost. Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also referred to as full costing or the full absorption method.Absorption costing is often contrasted with variable costing or direct costing. Variable costing is often useful for managements decision-making. A method of costing a product in which all fixed and variable costs are apportioned to cost centers where they are accounted for using absorption rates. This method ensures that all incurred costs are recovered from the selling price of a good or service. Also called full absorption costing.CHAPTER 9Advantages of Absorption Costing It recognizes the importance of fixed costs in production. This method is accepted by Inland Revenue as stock is not undervalued. This method is always used to prepare financial accounts. When production remains constant but sales fluctuate absorption costing will show less fluctuation in net profit and. Unlike marginal costing where fixed costs are agreed to change into variable cost, it is cost into the stock value hence distorting stock valuation. Absorption costing recognizes fixed costs in product cost. As it is suitable for determining price of the product. The pricing based on absorption costing ensures that all costs are covered. Absorption costing will show correct profit calculation than variable costing in a situation where production is done to have sales in future ( e.g. seasonal production and seasonal sales). Absorption costing conforms with accrual and matching accounting concepts which requires matching costs with revenue for a particular accounting period. Absorption costing has been recognized for the purpose of preparing external reports and for stock valuation purposes. Absorption costing avoids the separating of costs into fixed and variable elements. The allocation and apportionment of fixed factory overheads to cost centers makes manager more aware and responsible for the cost and services provided to others. It identifies the importance of fixed costs involved in production. The absorption costing method is accepted by Inland Revenue as stock is not undervalued. The absorption costing method is always used for preparing financial accounts. The absorption costing method shows less fluctuation in net profits in case of constant production but fluctuating sales. CHAPTER 10Disadvantages of Absorption Costing Absorption costing, also known as full costing is an accounting method that includes fixed overhead costs in the cost of goods sold by allocating an equal portion of the overhead cost to each finished unit of inventory. Absorption costing is the Generally Accepted Accounting Practices, or GAAP, method and publicly held companies must use this method on their income statements. While this system has some advantages, particularly for outside analysts, it also has a number of disadvantages, such as: As absorption costing emphasized on total cost namely both variable and fixed, it is not so useful for management to use to make decision, planning and control; As the managers emphasis is on total cost, the cost volume profit relationship is ignored. The manager needs to use his intuition to make the decision. Absorption costing is not useful for decision making. It considers fixed manufacturing overhead as product cost which increase the cost of output. As a result, it does not help in accepting specially offered price for the product. Various types of managerial problems relating to decision making can be solved only with the help of variable costing system. Absorption costing is not helpful in control of cost and planning and control functions. It is not useful in fixing the responsibility for incurrence of costs. It is not practical to hold a manager accountable for costs over which he/she has not control. Some current product costs can be removed from the income statement by producing for inventory. As such, managers who are evaluated on the basis of operating income can temporarily improve profitability by increasing production. Since absorption costing emphasized on total cost that is to say both variables as well as fixed, it is not useful for management to use to make decision, control, and planning. Besides, since the manager emphasizes on the total cost, the cost volume profit relationship is ignored. The manager, therefore, needs to use his intuition for decision making. Absorption costing can artificially inflate your profit figures in any given accounting period. Because you will not deduct your entire fixed overhead if you havent sold all of your manufactured products, your profit-and-loss statement does not show the full expenses you had for the period. This can mislead you when you are analyzing your profitability. Some of the important disadvantages of absorption costing are as follows:1) Inadequate for Managerial Decision Making Because absorption costing allocates fixed overhead costs to the unit level, it makes it appear as though additional units produced add overhead cost, when in fact they are revenue opportunities. If a company makes 100 baseballs per month for a variable cost of $4 and fixed overhead costs are $100 per month, absorption costing allocates $1 to each baseball for a total cost of $5 per baseball. If the company has an opportunity to sell another 10 baseballs at $4.50 each, absorption costing makes it look as if the company is taking a loss of $.50 each, when in fact it is making$.50 each because it is not adding fixed cost by producing 10 more units, only variable cost.2) Costs Hides in Inventory Inventory shows as an asset on a companys balance sheet. Since the company allocates fixed overhead to the finished unit level in absorption costing, until the company sells a unit, the cost does not show up as an expense, or Cost of Goods Sold. This means that if a company builds10,000 units of a finished good in a period, with $1 fixed overhead allocated to each unit, and sells only 1,000 of those units, $9,000 of the fixed overhead incurred in that period will show on the balance sheet as an asset, rolled into the cost of inventory, instead of as a cost.3) Unsuitable for Irregular Volume In theory, if a company using absorption costing produces and sells an equal, steady amount of units each period, absorption costing will accurately reflect the true cost of goods sold. However, if production or sales are irregular, this method of costing will make it appear that fixed overhead and variable costs fluctuate with sales. In fact, the level of production or sales does not affect fixed overhead costs, and only the level of production affects variable costs. For irregular production and sales patterns, variable costing gives a much clearer picture of the costs of running the business.4) Considerations Absorption costing has its benefits, particularly for external reporting. The fact that absorption costing combines variable and fixed costs allows a company to report its profits to shareholders without disclosing too much detail to competitors. In addition, since the business includes costs as an inventory asset on the balance sheet until it sells the inventory, this method sometimes benefits a slow quarters metrics. The alternative to absorption costing, known as variable costing, presents costs in a way that internal decision makers find useful. A well-informedmanager will look at costs using both methods.

CHAPTER 11Marginal Costing V/S Absorption Costing The difference between Marginal costing & absorption costing is as below: 1. Under Marginal costing: for product costing & inventory valuation, only variable cost is considered whereas, under absorption costing; for product costing & inventory valuation, both fixed cost & variable cost are considered. 2. Under Marginal costing, there is a different treatment of fixed overhead. Fixed cost is considered as period cost & by Profit/Volume ratio (P/V ratio), profitability of different products is judged. On the other hand, under absorption costing system, the fixed cost is charged to cost of production. A reasonable share of fixed cost is to be borne by each product & thereby subjective apportionment of fixed overheads influences the profitability of product. 3. Under Marginal costing, the presentation of data is so oriented that total contribution & contribution from each product gets highlighted. Under absorption costing, the presentation of cost data is on conventional pattern. After deducting fixed overhead, the net profit of each product is determined. 4. Under Marginal costing, the unit cost of production does not get affected by the difference in the magnitude of opening stock & closing stock. Whereas, under absorption costing, due to the impact of the related fixed overheads, the unit cost of production get affected by the difference in the magnitude of opening stock & closing stock.

CHAPTER 12Break Even Analysis Break even point means the point of no profit and no loss. BEP is the volume of output or sales at which the total cost is exactly equal to the revenue. Below the BEP the concern makes losses, at the BEP, the concern makes neither profit nor loss, above the BEP, the concern earns profits. The focal point of this analysis is the determination of the sales volume (in pesos or in units) that will equal its total revenues to its total costs, thus, where the profit equals zero. As stated earlier, since direct connection of expenses to production cannot be conclusively established under functional classification of costs, analysis under CVP, as well as BE analysis, is directed towards cost behavior. Thus, if we reclassify our costs from functional to behavioral, our income statement would look like this:

Sales xx Less: Variable Cost (VC) (xx)Contribution Margin (CM) xx Less: Fixed Cost (xx) Profit (loss) xx

Contribution Margin (CM) is the excess of sales over variable cost or the excess from sales when variable costs are deducted. It can be computed per unit or total. In computing for the CM per unit, simply deduct the VC per unit from the selling price of each unit. This is also synonymous with marginal income, marginal balance, profit contribution and others. Break-even analysis is an analytical technique that is used to determine the probable profit at any level of production. It is basically an extension of marginal costing. Break-even point is that point at which there is neither profit nor loss. It is at point costs are equal to sales. It is otherwise called as balancing point, neutral point, equilibrium point, loss ending point, profit beginning point etc. After BEP is achieved, all the further sales will contribute to profit. At BEP, Sales Variable cost = Fixed costs. OR Contribution = Fixed costs. Break-even Point is the representation position of that volume of sales or production which has no profit no loss. It means total sales are just equal to total cost. Advantages of Break-even analysis:1. Profit planning2. Product planning3. Activity Planning4. Lease Decisions5. Make or buy decisions6. Capital profit decisions7. Distribution channel decisions8. Price decisions9. Choosing Promotion Mix10. Decision regarding profitability of products or department.

CHAPTER 13Assumption and Limitations Break-Even Analysis 1. All costs are classified as either fixed or variable. If not impossible or impractical, dividing costs into the variable and fixed cost elements as an extremely difficult job. This is attributable to the inherent nature or characteristics of the cost per se. 2. Fixed costs remain constant within the relevant range. Fixed costs remain unchanged at any level of activity within the relevant range, even at the zero level. 3. The behavior of total revenues and total costs will be linear over the relevant range, i.e. will appear as a straight line on the BE chart. This is based on the idea that variable costs vary in direct proportion to volume; the fixed costs remain unchanged, hence drawn as a straight horizontal line on the graph within the relevant range; and that selling price is constant. 4. In case of multiple product companies, the selling prices, costs and proportion of units (sales mix) sold will not change. This cannot always be correct. Sales mix ratio may be due to the change in the consuming habits of customers. Selling prices of the individual products may likewise change due to competition, popularity and salability of the products, etc. 5. There is no significant change in the inventory levels during the period under review. Stated in another way, production volume is assumed to be almost (if not exactly) equal to the sales volume, which causes an immaterial (or none at all) difference between the beginning and ending inventories. 6. Other assumptions which have already been discussed in the preceding numbers, are again credited and highlighted here as follows: Unit selling price will remain constant. Unit variable cost will not change prices of the factors of production like material (This may include costs, labor costs etc.) There will be no change in efficiency and productivity. The design of the product will not change.(A change in the product may bring about a change and production the design of in production costs, selling price volume.CHAPTER 14Cost-Volume-Profit analysis Cost-Volume-Profit (CVP) Analysis is defined as a systematic examination of the relationships among costs, activity levels, or volume, and profit. CVP analysis establishes the relationship of profit to level of sales. And one of these relationships is the Break-even analysis. Direct connection of expenses to production cannot be conclusively established under functional classification of costs, analysis under CVP is directed towards cost behavior; the way costs behave or change with respect to a change in the activity level. Costs can be classified according to its behavior as: Fixed Costs These are costs that do not change regardless of changes in the level of activity within a relevant range. In other words, they remain constant regardless of the change in the activity level per total; however, fixed cost per unit is inversely proportional to the activity level. Variable Costs In total, these costs change directly and proportionately with the level of activity. As the activity level increases, variable cost per total will also increase proportionately to the increase in activity level. However, variable cost per unit remains constant, within the relevant range. Semi-Variable Costs Costs that varies with the change of activity level but not proportionately, they are called semi-variable costs. They may either increase at an increasing rate or increase at a decreasing rate. A typical example of this is the cost of electricity (increasing at an increasing rate) because it is subject to graduated brackets, thus, the greater the consumption, the higher the rate per kilowatt hour as they will be categorized in a higher bracket.

Semi-Fixed Costs This kind of costs has the characteristics of both variable and fixed cost and is usually known as the step function cost or step cost. Like semi-variable cost, semi fixed cost increases with activity level but not proportionately. And like fixed cost, it is constant for some stretches of activity levels. Mixed Costs Costs that cannot be identified by a single cost behavior pattern are called mixed costs. This kind of cost is composed of variable and fixed cost. We have concluded earlier that costs are more meaningful when they are classified according to behavior. When costs therefore are mixed, it is important that we know how to segregate them. Some tools and techniques popularly used are the High-Low Method, Scatter Graph Method, Regression Analysis, and CorrelationCost-Volume-Profit analysis is the analysis of three variables, i.e. cost, volume and profit.Cost-Volume-Profit analysis helps the management in profit planning. Profit of a concern can be increased by increasing the output and sales or reducing cost.

The most significant single factor in planning of the average business is the relationship between the volume of business, its costs and profit.

-HEISER

CHAPTER 15Contribution Analysis Contribution is the most important concept in Marginal costing. It is, as seen above equal to Sales Less Variable Cost. Contribution is the profit before adjusting the fixed costs. Marginal costing is concerned with the `product costs` rather than the `periods costs`. Contribution indicates the:Product profit = product Income product cost i.e. Contribution = sale Value Variable cost. Marginal costing assumes that ht excess of sales value over variable costs contributes to a fund which will cover fixed costs as well as provide the concern`s profits. The amount of contribution is credited to the marginal profit and loss account. The fixed costs are debited to the marginal profit and loss account. If the contribution is equal to the fixed costs, the concern is said to break- even profit. If the contribution is less than the fixed costs, there will be net loss. Thus, the fixed costs which are period costs do not affect the product cost. Fixed costs are directly adjusted in the profit and loss account prepared for the relevant period. The concept of contribution plays a key role in assisting the management in taking many important decisions such as1. Deciding the break-even point, 2. Deciding which article to produce, or continue or discontinue to produce, 3. Deciding the quantity of each article to be produce or sold, 4. Fixing the selling price, especially in a trade depression, or for a special order.

The difference between contribution and accounting profit is explained below. Contribution1. It is a concept used in Marginal costing. 2. It is before deducting Fixed Costs.3. At break- over point, Contribution is equal to fixed cost

Profit 1. It is an accounting concept. 2. It is after deducting Fixed Costs. 3. Profit arises only when Sales go beyond the break- even point.

CHAPTER 16Conclusion Marginal cost is the cost management technique for the analysis of cost and revenue information and for the guidance of management. The presentation of information through marginal costing statement is easily understood by all managers, even those who do not have preliminary knowledge and implications of the subjects of cost and management accounting. Absorption costing and marginal costing are two different techniques of cost accounting. Absorption costing is widely used for cost control purpose whereas marginal costing is used for managerial decision-making and control. The following are the criticisms towards absorption costing:1. A portion of fixed cost is carried over to the subsequent accounting period as part of closing stock. This is an unsound practice because costs pertaining to a period should not be allowed to be vitiated by the inclusion of costs pertaining to the previous period and vice versa.2. Absorption costing is dependent on the levels of output which may vary from period to period, and consequently cost per unit changes due to the existence of fixed overhead. Unless fixed overhead rate is based on normal capacity, such changed costs are not helpful for the purposes of comparison and control. The cost to produce an extra unit is variable production cost. It is realistic to the value of closing stock items as this is a directly attributable cost. The size of total contribution varies directly with sales volume at a constant rate per unit. For the decision-making purpose of management, better information about expected profit is obtained from the use of variable costs and contribution approach in the accounting system.

CHAPTER 17Bibliographycostaccounting.blogspot.comwww.accountingtools.comwww.investopedia.combasiccollegeaccounting.com