Marginal Costing:

Marginal Costing A Presentation By: Ankur Jha & Adit Gupta

Marginal or Variable Costing:

Marginal or Variable Costing According to the Chartered Institute of Management Accountants, London, “Marginal costing is the ascertainment of marginal costs and of the effect on profit of changes in volume on type of output by differentiating between fixed costs and variable costs.” Thus marginal costing refers to: differentiating between fixed costs and variable costs, ascertainment of marginal costs, and Finding out the effect on profit due to change in volume or type of output

Marginal Cost:

Marginal Cost The Chartered Institute of Management Accountants, London, defines the term marginal cost as “the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit.” Thus, marginal cost is the amount by which total cost changes when there is a change in out put by one unit. Marginal cost per unit remains unchanged irrespective of the level of activity or output. It is also known as Variable Cost. Marginal cost is the sum total of direct material cost, direct labor cost, variable direct expenses and all variable overheads. The marginal cost is the same as the variable cost.

Fixed Cost:

Fixed Cost It involves the way a cost changes in relation to changes in the activity of an organization. The activity refers to a measure of the organization’s output of products and services example number of contact classes conducted, number of students passed in MBA, number of cars manufactured by an Automobile industry, number of meals served by a hotel. A fixed cost remains unchanged in total as the level of activity varies. If activity increases or decreases say by 20%, the total fixed costs remain the same e.g. depreciation, property tax, rent to landlord. But fixed costs per unit will change.

Variable Cost:

Variable Cost A variable cost changes in total in direct proportion to a change in the level of activity or cost driver. If activity increases, say by 20%, total variable cost also increases by 20 %. The total variable cost increases proportionately with activity. Variable cost fixed per unit but varies in total.

Cost Volume Profit (CVP) Analysis:

Cost Volume Profit (CVP) Analysis This technique summarizes the effects of changes in an organization’s volume of activity on its costs, revenue and profit. CVP analysis can be extended to cover the effects on profit of changes in selling prices, service fees, costs, income tax rates and the organization’s mix of products or services. It provides management with a comprehensive over view of the effects on revenue and costs of all kinds of short run financial changes

Cost Volume Profit (CVP) Analysis (Contd.):

Cost Volume Profit (CVP) Analysis (Contd.) Although, the word “profit” appears in the term, CVP analysis is not confined to profit seeking enterprises. Managers in non profit organizations also routinely use CVP analysis to examine the effects of activity and other short run changes on revenue and costs. It is being used as a regular organizational tool. In CVP analysis, it is necessary that expenses should be categorized according to their cost behavior that is fixed or variable.

Break Even Analysis:

Break Even Analysis It is an extension of or even part of marginal costing. It is a technique of studying cost volume profit relationship. Basically, the break even analysis is aimed at measuring the variations of cost with volume. It is a simple method of presenting the effect of changes in volume on profits. It is also known as CVP analysis.

Break Even Analysis:

Break Even Analysis The various assumptions are: All costs can be classified into fixed and variable Sales mix will remain constant. There will be no change in general price level The state of technology, Methods of production and efficiency remain unchanged. Costs and revenues are influenced only by volume Cost and revenues are linear. Stocks are valued at marginal cost Unit produced and sold are same.

Break Even Point:

Break Even Point BEP is the volume of activity where the organization’s revenues and expenses are equal. At a particular amount of sales, the organizations have no profit or loss: it normally breaks even.

Margin of Safety:

Margin of Safety The safety margin of an enterprise is the difference between the budgeted sales revenue and the break even sales revenue. The safety margin gives management a feel for how close projected operations are to the organization’s break even point. The formula is: MOS = Sales-BES or MOS = Profit PV Ratio

Limitations Of Marginal Costing:

Limitations Of Marginal Costing Suitability Inventory valuation difficulties Segregation of costs Time factor Sales emphasis

Applications Of Marginal Costs:

Applications Of Marginal Costs Level of activity planning Alternative methods of production Make or buy decision Fixation of Selling Price Selection of optimum sales mix New Product introduction Balancing of profits

Types of Costing:

Types of Costing

Difference Between Marginal and Absorption Costing:

Difference Between Marginal and Absorption Costing S. No. Basis of Distinction Absorption Costing Marginal Costing 1 Charge Full costs (fixed and variable) are charged to production. Only variable costs are charged to production. 2 Classification Expenses are classified on functional basis. The classification is as per nature of expenses-fixed and variable. 3 Consideratio n of cost Fixed costs are considered inventariable costs. Fixed costs are considered as period costs. 4 Focus The emphasis is on profit (sales less total costs) The thrust is on contribution (sales less variable cost). Increase in contribution means increase

Difference Between Marginal and Absorption Costing:

Difference Between Marginal and Absorption Costing S. No. Basis of Distinction Absorption Costing Marginal Costing 5 Inventory Valuation Basis of inventory valuation takes into account fixed component of overheads. Inventories are valued at marginal or variable costs. 6 Overheads Absorption Since all overheads are absorbed to production, over-recovery of overheads can be there. On account of only variable overheads being absorbed to production, there can be under-recovery of overheads. 7 Treatment of Overheads Over under-recovery of overheads can be transferred to Costing Profit & Loss Account. Actual fixed overheads are wholly transferred to Costing Profit & Loss Account.

Difference Between Marginal and Absorption Costing:

Difference Between Marginal and Absorption Costing S. No. Basis of Distinction Absorption Costing Marginal Costing 8 Decision-Making Product Costing depends on total cost per unit. Product costing considers only the variable costs, hence decision-making is affected.

Some of the useful equation of marginal costing :

Some of the useful equation of marginal costing Sales Revenue – Variable Expenses = Fixed Expenses + Profit Sales Revenue – Variable Expenses – Fixed Expenses = Profit Sales – Variable costs = Contribution Contribution – Fixed costs = Profit Sales – Contribution = Variable costs

Queries Welcomed:

Queries Welcomed

Quiz:

Quiz Marginal cost is sum total of ________. Marginal cost is the sum total of direct material cost, direct labor cost, variable direct expenses and all variable overheads. The marginal cost is the same as the variable cost.

Quiz:

Quiz MC is extra cost incurred ___________. Due to change in the output. CVP refers to change in _____________. organization’s volume of activity on its costs, revenue and profit. BEP stands for _______. Break-Even Point. MOS is ________________. Margin of Safety.

Quiz:

Quiz Sales – Variable Costs = ________. Fixed Expenses + Profit Contribution = _______________. Fixed Costs + Profit Contribution ____________= Profit. -Fixed Costs