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8/9/2019 Shalini Project Marginal Costing
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THE STUDY ON MARGINAL COSTING
1.1 INTRODUCTION ABOUT THE INTERSHIP
The project mainly focused on capital structure analysis at Nandini Hi-tech product Plant the
term marginal costing analysis refers to the relationship between total costs Such as fixed
cost !ariable cost sales marginal costing refers to the ascertainment of "arginal cost and
other effect on profit of changes in type of output by differentiating #etween fixed and
!ariable cost$ "arginal costing is not a separate costing it is only
Techni%ue used by accountant to aid management decision$ &t is also called as 'direct
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THE STUDY ON MARGINAL COSTING
costing( in )S* this techni%ue of costing is also +nown as '!ariable costing
',ifferential costing( or out-of-costing$
Since the re!enue is e%ual to total cost the business entity earns no profit nor does it incur
loss$ &f the sales !olume exceeds the brea+ e!en !olume e!en by one unit the company earns
profit$ The amount of profit is e%ual to the product of excess units sold co!er and abo!e
brea+- e!en !olume. and unit contribution$ &n the same way is the sales !olume falls below
the brea+-e!en analysis does not aim only at finding out the #rea+-e!en point$ /ather it aims
at analy0ing a number of other things besides the computation of brea+-e!en point. such as
P12 ratio *ngle of incidence "argin of safety profit or 3oss *bsorbed and )nabsorbed
fixed costs ect$ Therefore #rea+-e!en analysis in its broader sense refers to the analysis of
impact of costs price and !olume and profit$ &n other words it establishes the relationship
between cost price !olume and profit$
This project reports contains fi!e chapters which begins with need for study 4bjecti!es andscope of the study research methodology used e
The second chapter it co!ers industry profile and company profile which includes promoters
information !ision mission and %uality of the product competitors information S54T
analysis financial statement ect$
The third chapter theoretical bac+ground of the study it includes elaborati!e
&nformation on the subject chosen for better understanding and usage in the analysis$
The fourth chapter comprehensi!e co!erage of analysis and interpretation of the data
collected with rele!ant tablets and graphs$ /esults obtained by using statistical tools must beincluded$
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THE STUDY ON MARGINAL COSTING
The fifth chapter deals with the summary of findings conclusion and suggestion
recommendations$
'Nandini hi-tech product plant the mil+ procurement by the co-operati!es in 6arnata+a has
steadily o!er the years due to the efforts and policies fa!ouring mil+ production$ 7xisting
infrastructure of the mil+ co-operati!e in the state was found to be insufficient for handling
the excess mil+ in order to meet the increased processing re%uirement 6arnata+a mil+
production 6"8.$in consultation with national dairy de!elopment boardN,##.concei!ed
to setup a product dairy of 9::T3P, with ;:"TP, power plant in the years ; mil+ unions in 6arnata+a$ The project was entrusted to
N,,# on turn+ey exaction basis$
& am doing project in manufacturing sector with respect to Nandini hi-tech product plant
?H*NN*/*@*P*T*N* & hope this report will be extremely useful for those it is mean$
?onstructi!e and healthy suggestions for impro!ement of the report will be great fully
appreciate$
>$< T4P&? ?H4S7N 84/ TH7 ST),@
The topic selected for analysis of marginal costing or cost !olume and profit analysis at
Nandini hi-tech production plant$ The !ariation of cost is also analy0ed with their effects on
the o!erall wor+ing or unit in the present scenario Nandini hi-tech product plant one of the
leading producers of mil+ product and facing the problem of huge cost of production$ The
companies is incurred more capital expenses and insufficiently of the raw material$ To
increase profit the company has to increase the sales$ &t should note #7P under !arious
situation of changing sales mix price and cost if has to study what are the most and least
profitable product and it to forecast the impact on profit when sales mix is charged$
>$; N77, 84/ TH7 ST),@
The need of the study helps the company it identity their position by which the company can
increase or decrease the total cost of production$ &t also helps the company to identify and
offer a minimum rate of product price according to the expectations of the customer so that
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THE STUDY ON MARGINAL COSTING
the companys sales le!el will get increased$ Hence it is prepared to understand the study on
marginal$
>$9 4#A7?T&27S 48 TH7 ST),@
B To understand the financial position of the company
B To determine the selling price which will gi!e the desired profitC
B To determine the sales !olume to earn a desired profit or return on capital employed$
B To identity the brea+ e!en sales contribution margin ratio margin of safety with
respect to Nandini hi-tech plant
B To measures the degree of le!erages with respect to Nandini hi-tech$
B To analy0e the trend of margin costing with respect to Nandini hi-tech plant
>$= S?4P7 48 TH7 ST),@
B The study is mainly concentrated on cost !olume and profit analysis of the
company the company cost control will influence more on the le!el of cost management of
the company$
B The study is on the three years sales of the company which will gi!e a clear picture
about the minimum sales re%uire to achie!e brea+e!en$ The study is on !ariable cost
contribution fixed cost P 2 ratio brea+e!en sales margin of safety prating le!erage is ;
years$
B This study is limited only to Nandini hi-tech product plant and analysis of marginal
costing is only for 9years that is from :>191> to ;>1;19$
B To understand the importance of the determination of brea+-e!en-point with respect to
changes in sales and re!enue$
>$D "7TH4,434E@
/esearch methodology describes the !arious steps that are generally adopted by a
researcher in studying the research problem along with the logic behind them$ ,ata isimportant for any study has been obtained from the secondary data$ The secondary data can
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THE STUDY ON MARGINAL COSTING
be collected from the financial statement li+e final account annual report N*N,&N& H&-
T7?H P/4,)?T P3*NT$
>$F 3&T7/*T)/7 /72&75
3iterature re!iew is most important to identify the problem of the study which can be sol!ed
by collection of data$ &t is !ery important to +now that the wor+ is doing by researcher in a
research should not be repeated again$ 3iterature re!iew obser!ed about the wor+ that it is
doing is repeating unintentionally$ &t also helps to a!oid the mista+es which already done by
another one$ So researcher can impro!e the research is depends on the past +nowledge and
not includes a part of +nowledge$ * well created re!iew establishes creditability of the
researcher of the study so he can get the entire benefits of his wor+$
This research study was conducted by " SH&2* 6)"*/ during the year :->>
titled( * P/4A7?T /7P4/T 4N "*/E&N*3 ?4ST&NE( at #72?4N 5*@4/S$p!t$ltd
during the research he found the *berdeens Spend *nalysis #enchmar+ing Study G
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THE STUDY ON MARGINAL COSTING
reduction in manual correction of spend cleansed and classified
;$ F; rate compliance to contractual agreement$
The goal of this primer has been to describe the major principles concepts and methods for
doing economic analysis of highway projects$ The co!erage of these subjects has been
necessary brief$ 8or the interested reader a wealth of additional information from publicly
accessible sources$
#enefit #7P analysis is the most comprehensi!e method to e!aluate the reasonableness of
highway projects in economic terms$ &n some cases when it is clear that a project must be
underta+en regardless of its cost$ e$g$ a critical bridge on a interstate highway must be
repaired or replaced in +ind.$
This research study was conducted by #alachandru ,hananjaya during the year
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THE STUDY ON MARGINAL COSTING
;$ /educing raw material usage in production down time$
?4N?3)S&4N
&n this study is attempted to made analy0e the #7P analysis of the simple unit$ Since the
Nirani Sugar$ P!t$ltd is facing hea!y competition in an around area of the region$ &t is
essential to focus on the aspect of the marginal costing$
#@ /)SS H7*,37@
This article focuses on costK costs are the monetary !alues of the resources which ha!e to be
used for the production$ ?ost control can defined as getting the best results with the lowest
offering of resources$ The management instrument that can be used to control the costs of a
company are$ #udgeting #alanced Scorecard #enchmar+ing *cti!ity-#ased "anagement$
These instruments can be used in combination with each other because they can support the
decisions made by management$
#@ S4/&N #/&?&)& S4/&N73 ?*P)SN7*N)$J 3&"&T*T&4N 48 TH7 ST),@
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THE STUDY ON MARGINAL COSTING
The study is based on secondary data and the data a!ailable from the annual reports of
the company$
*s data was confined to project did not allow for the in depth study regarding the
performance of the company$
*s it is an external study conclusion and suggestions are not ultimate and are base on
personal judgement and the ability of the researcher to understand the concept$
The study is conducted only on determination of marginal costing
&t assumes that the fixed costs are constant
&t multi-product companies it assumes that the relati!e portions of each product sold
and produced are constant$
&t assume that the %uantity of goods produced is e%ual to the %uantity of goods sold
&t assumes a!erage !ariable costs are constant per unit of output$
"arginal costing is only a supply side analysis as it tells you nothing about what
sales are actually li+ely to be for the product at these !arious prices$
2.1 INDUSTRY PROFILE
History of Milk I!"stry#
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THE STUDY ON MARGINAL COSTING
*round D:-F: years bac+ at the time of #ritish rule the farmers of Eujarat were one
of the best mil+ producing state in &ndia$ There was a #ritish agent named Polson who was
deciding the price of the mil+$ The farmers were not getting right price of their production$
This harassment continued for years$ 3ater the farmers organi0ed themsel!es to a!oid this
harassment$ The farmers complained to Sardar 2allabhai Patel about this and decided not to
sell mil+ to the #ritish military people$ This is how the concept of union came into picture$
8rom >I9F-9J Eujarat started selling mil+ directly to the consumer not gi!ing mil+ to
#ritish people our late Prime "inister 3albahaddurshastry thought to from same type of
unions throughout &ndia$ Since then operation flood came into existence$ &n >IF= 6arnata+a
also implemented the !illage co-operati!e societies$
O$%r&tio Floo!#
National ,airy ,e!elopment #oard N,,#. was found in >ID=$ ,rL 2arghese
6urian the founder chairman of N,,# after which dairy de!elopment became a regular
organi0ation and the operation flood program was concei!ed by the N,,#$
O$%r&tio Floo! P'&s% 1#
&t was launched in >IF: following in an agreement with world food program$ The first
phase of operation flood laid the foundation for &ndias modern dairy industry that ultimately
met the countrys need for mil+ and mil+ products$
O$%r&tio Floo! P'&s% 2#
&t was implemented between >IJ> and >IJ=$ &t integrated the dairy de!elopment
projects being implemented with the aid of 5orld #an+$
O$%r&tio Floo! P'&s% (#
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THE STUDY ON MARGINAL COSTING
&t aimed at ensuring that the co-operati!e organi0ations become self-sustaining$ This
program aimed at substantial expansion of the dairy processing and mar+eting facilities with
extended mil+ procurement infrastructure and professionali0ation of dairy de!elopment$
,airy farmers are highly dependent upon ha!ing a local processing facility to buy
their product because mil+ rapidly deteriorates prior to processing dairy farmers are highly
dependent upon ha!ing a local processing facility to buy their product because mil+ rapidly
deteriorates prior to processing$ This has encouraged the de!elopment of co-operati!e in
dairy sector$ ?o-operati!e rules usually re%uire the compulsory purchase of all member
productsK hence by becoming members of a local co-operati!e dairy farmers ha!e been able
to ensure an outlet for their highly perishable product$
N&tio&l D&iry D%)%lo$*%t Bo&r!
Itro!"+tio#
The go!ernment of &ndia constituted the 'National ,airy ,e!elopment #oard( in the year
>ID= Shri$ 3albahadurShastry initiated the setting up of N,,#$ The board is registered
under the societys registration act and public trust at the head office is at *nand and is
organi0ation in to I functional di!isions$
O,-%+ti)%s of N&tio&l D&iry D%)%lo$*%t Bo&r!
To sponsor promote manage ac%uire construct control any plant or wor+ which promotes
or ad!ances the projects of general public utility reactions to dairying$
>$ To ma+e a!ailable on re%uest information ser!ices to increase production
de!elopment to release to production and mar+eting of agricultural and food products$
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THE STUDY ON MARGINAL COSTING
increasing mil+ dairying achie!ed in the procurement with an almost emphasis on the %uality
and in the process conser!e the socio economic interest of rural mil+ producers the
go!ernment of 6arnata+a through 6"8 has proposed$
4peration flood came to third phase >IJD-I9. after successfully completing first
phase >IJ>-J=. the product operation flood laid stress on setting up rural mil+ producers co-
operati!e organi0ation to produce and mar+et the mil+ on one than mar+et technical input for
mil+ production the other hand$
0orl! to$ *ilk $ro!"+i +o"tri%s#
COUNTRY3S 2411 51444MT6
&N,&* >=::::
)N&T7, ST*T7S JJFDJ::
?H&N* ;>FJ:::
/)SS&* ;>J:9I::
"7&?4 >>:F:::
)6*&N7 >:J>per cent of mil+ buffaloes are +ept in towns
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THE STUDY ON MARGINAL COSTING
and cities$ )$P$ is the largest producer of mil+ followed by Punjab #ihar *ndhra Pradesh and
/ajasthan$ "$P$ and 4rissa account for low production$
T&,l% (.2# Pro!"+tio of Milk i I!i& 51444 To%s6
@ear ?ow mil+ #uffalo mil+ Eoat mil+ Total
9JI=
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THE STUDY ON MARGINAL COSTING
S'%tti'&lly9 C.R.P&t&.
COMPANY PROFILE
?4"4*N@ N*"7O 6"8 Nandini Hi-Tech Product Plant
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THE STUDY ON MARGINAL COSTING
Shettihally
#$"$/oad
?hannarayapatna
Hassan ,ist$.
-=F;>>D
,&/7?T4/O Eo!indegowda
N*T)/7 48 #)S&N7SSO "il+ based powder )HT "il+
?o-operati!e unit$
T@P7 48 #)S&N7SSO ?o-operati!e units include Pri!ate *gencies$
T73-N4O :J>F
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THE STUDY ON MARGINAL COSTING
5hole mil+ powder5"P.
?*P*?&T@ 48 P3*NTO "il+ processing-9:: T3P,
"il+ powder production-;:"TP,
#utter production->="TP,
Ehee production-
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THE STUDY ON MARGINAL COSTING
BAC7ROUND#
The mil+ procurement by the co-operati!es in 6arnata+a has steadily increased o!er the years
due to the efforts and policies fa!ouring mil+ production$ 7xisting infrastructure of the mil+
co-operati!es in the state was found to be insufficient for handling the excess mil+$ &n order
to meet the increased processing re%uirement 6arnata+a "il+ 8ederation 6"8. in
consultation with National ,airy ,e!elopment #oard N,,#. concei!ed to setup a product
dairy of 9:: T3P, with ;: "TP, powder plant in the year ; mil+ unions in 6arnata+a$ The project was entrusted to N,,# on
turn+ey execution basis$
SAILENT FEATURES OF THE MIL7 PRODUCTS#
7ffluent treatment plant using en!ironment friendly anaerobic technology$
States of art automation ,?S1S?*,*. for mil+ processing and powder
manufacturing and energy efficient e%uipment and machineries adhering to H*??P
standards along with ad!anced dairy transaction processing system 7/P.$
8ully automated refrigeration plant using en!ironment friendly ammonia li%uid o!er
feed system with &?7 silo$
The project has been setup in a 33P, 3a+h liter1day.
2.( Pro*ot%rs#
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THE STUDY ON MARGINAL COSTING
Eo!ernment of 6arnata+a$
,irector of NHPP Honnayya Shetty and co-directors$
7mployees of the organi0ation$
8ormers$
2.: ;ISION#
'To be the leading producer of mil+ products by introducing ad!anced %uality enhancement
techni%ues$ To pro!ide fresh %uality products competiti!e prices there by uplifting the
financial position of the rural mil+ producers$(
To ensure prosperity of the rural "il+ producers who are ultimate owners of the
8ederation$
To promote producers oriented !iable co-operati!e society to impart an impetus to the
rural income dairy producti!ity and rural employment$
To bridge a gap between price of mil+ procurement and sale price$
To de!elop business acumen in mar+eting and trading disciplines so as to ser!e
consumers with %uality mil+ gi!e a fillip to the income of mil+ producers$
To complete with "N?s and pri!ate ,airies with better %uality of mil+ and mil+
products in the process sustain in!incibility of co-operati!es$
MISSION#
'The mission is to become a leading concern in the mil+ products manufacturing by
implementing modern machinery e%uipments to pro!ide %uality mil+ products to the
customers$(
Procuring the raw mil+ from the local farmers at a fair price$
Pasteuri0ation and homogeni0ing of the procured raw mil+$
Heralding economic social and cultural prosperity in the li!es of our mil+ producer
members by promoting !ibrant self-sustaining and holistic co-operati!e dairy
de!elopment in 6arnata+a state$
Producing the other mil+ products$
Transporting the pasteuri0ed mil+ in !arious %uantities from processing plant to the
urban areas$
Supply mil+ to the consumer at a reasonable rate$
,e!eloping good infrastructure facilities$
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THE STUDY ON MARGINAL COSTING
$ Tetra Pac+$
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THE STUDY ON MARGINAL COSTING
?ows pure mil+ )HT processed bacteria free in a tamper- proof tetra pac+ which +eeps this
mil+ fresh for I: days without refrigeration until opened$ &t is a!ailable in =::ml ::mlat premium store across the country$ 4n *pril :; 9 - E44,3&87 S*37S T4)?H7,
=$;33pd all time high$
2. B"tt%r#
#utter ser!es as the balance wheel of the dairy industryK surplus mil+ is
con!erted into butter while during times of scarcity the mil+ intended for
butter ma+ing is used for more essential products$ &t is obtained by
churning cream gathering the fat into a compact mass and then wor+ing
it$ &t is a!ailable in
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THE STUDY ON MARGINAL COSTING
(. '%%#
&t is the product obtained from surplus fat prepared from butter $&t is
Pac+ed in >=+g tin pac+s respecti!ely$ *nd in tan+er it will be sent for
Thirumala$ 8irstly license is obtained after which special grading is gi!en
then it is pac+ed$
'%% $&+k%t
:. Ski* *ilk $o/!%r#
"il+ powder is made from pure mil+K processed and pac+ed
hygienically $&t is a!ailable in year$
Milk $o/!%r $&+k%t#
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THE STUDY ON MARGINAL COSTING
Pri+% t&,l%#
P/4,)?TS R)*NT&T@ P/&?7in /s.
E44, 3&87 "&36 >:: ml
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THE STUDY ON MARGINAL COSTING
=::ml +g 6SH&/* #*E@*
S?H7"7 8/4" E42T.
*s per Eo!t standard
2.> Ar%&s of o$%r&tio#
Nandini Hi-Tech Product Plant is set up in a
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THE STUDY ON MARGINAL COSTING
They ha!e procurement group contract !ehicles$
7gO mil+ tan+ers
(. MIL7 PROCESSIN
/aw mil+ reception doc+ ?ream separators
"il+ pastures
Stored tan+s
7lectronic mil+ tester and mil+ scan
:. PAC7AIN
E44, 3&87 "il+ pac+aging machine
8la!oured mil+ pac+aging machine Ehee pac+aging machine
Nandini "il+ powder
Nandini #utter
=. ENINEERIN
/eformation e%uipments
#oiler e%uipments
7ffluent treatment plants
7lectronic generation
>. MAR7ETIN
,istribution networ+
*gents
Parlours
T?,
5S,
?. DISTRIBUTION AND TRANSPORTATION
Truc+s
*uto
"obile !an
@. OTHER FACILITIES Security canteen facilities
Shift facilities- ; shift per day
Heat allowance
?old allowance
Production bloc+
*dministration bloc+
8uelling point
Earage bloc+
F"+tios of t'% $ro!"+tio !%$&rt*%t#
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THE STUDY ON MARGINAL COSTING
?ollection of raw mil+ from different sources
Testing the recei!ed mil+ for %uality
5eighing
Processing
Pasteuri0ation
Storing mil+ and
Pac+ing mil+ pac+ing
MIL7 RECEPTION AND STORAE#
Two tan+er reception bays with a maximum capacity of ;::::ltr per hour are
pro!ided$ &t will be weighed and laboratory tested to chec+ temperature PH SN8
8at and *cidity$ Tan+er will be weighed at electronic weigh bridge 9: tons.$
&nstalled at the entrance gate$ /ecorded weighments are subse%uently transmitted to
the central control room$ *fter automatically agitating the mil+ for lab testing to
confirm to the re%uirements of temperature fat SN8 acidity ph$
&f the %uality of the mil+ is found acceptable the tan+er is ta+en for unloading$ The lab
test reports are also transmitted to the central control room$ )nloading of the tan+er is
done by connecting the hose pipe to the tan+er !al!e$ /aw mil+ flows through the
stain less steel desecration !essel and inline disc type strainer and is pumped by a
sanitary centrifugal pump$
Two mil+ processing lines each of capacity of
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THE STUDY ON MARGINAL COSTING
Milk stor&%#
ORANISATION STRUCTURE
BGS INSTITUTE OF TECHNOLOGY Page 26
,irector
Eeneral "anager
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THE STUDY ON MARGINAL COSTING
0OR7 FLO0 MODEL
BGS INSTITUTE OF TECHNOLOGY Page 27
"anager
7ngineering.
"anager
,airy.
,eputy
"anager
"anager
8inance.
"anager
"ar+eting.
"anager
System.
"anager
*dmin.
"anager
Purchase.
*dministratio
n 4fficer
*ssistant
"anager
*ssistant
,irector
*ssistant
"anager
*ccounts
4fficer
,eputy
"anager7ngineerin
*dmin
*ssist1
"ar+eting1
*dmin
*ssist
"anagers
4fficers
*ssistant
7ngineering
,airy
Super!isor
Technical
4fficers
*ssistant
"anager
*dministration
*ssistant
*ccount
*ssistant
System
4perators
Technician Technician
Primary mil+ producer
"il+ing
2illage dairy co-operati!e society
?hilling
Transportation
Security chec+"il+ /eception doc+Eood mil+ recei!edRuality chec+?hilling mil+Primary mil+ producerProcessingProduction SectionPac+ing Section
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THE STUDY ON MARGINAL COSTING
2.@ Co*$%titors Ifor*&tio#
5&6 For oo! lif% *ilk#
Nestle a mil+ *")3 T**M* #ritannia etc$$
BGS INSTITUTE OF TECHNOLOGY Page 28
Ruality chec+ of information
,ispatch through transport !ehicle
Security chec+ *gents and consumers
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THE STUDY ON MARGINAL COSTING
5,6 For B"tt%r#
Nestle
5+6 For '%%#
N42* pure Ehee Nestle 7!ery day *")3 Pure Ehee ?osmo!edascocos Ehee #io.
etc$$
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THE STUDY ON MARGINAL COSTING
5!6For *ilk $o/!%r#
Nestle N&,4 4rganic !alley "illac &nfant dry mil+ etc$
*nother competitors are ,odla mil+ *ro+ya mil+$
2. S0OT ANALYSIS
S54T is an abbre!iation of four terms that is Strength 5ea+ness 4pportunities
and Threats$ S54T analysis is good for analy0ingan company and also it is a tool
for auditing an company and its en!ironment$ This analysis will gi!e a cross section
BGS INSTITUTE OF TECHNOLOGY Page 3!
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THE STUDY ON MARGINAL COSTING
of the company$ &t is the first stage of planning and helps mar+eters to focus on +ey
issues$
STRENTH#
Nandini enjoys good brand image$
Nandini is a large procurement base$
6$"$8 is the huge infrastructure for processing$
6"8 has the ?ompetiti!e prices$
Nandini Product dairies different range of product$
6$"$8 has wide distribution networ+ leads to regular and timely supply$
6$"$8 enjoys highest mar+et shares in the pac+ed mil+ segment$
0EA7NESS#
Perishable commodity$
3ac+ of professional man power$
#ureaucratic method of functions$
,ue to bad smell that persist causes low sales$
OPPORTUNITIES#
Huge mar+et demand$There is scope for de!eloping in new area$
*!ailability of buffalo mil+-&mpro!es mar+et mil+ %uality$
Predominant of loose mil+ segment di!ide appropriate strategies$
THREATS#
&ncrease of competitors mil+ !endors unorganised sector$
8lexibility in commission structure$
No entry barriers for pri!ate players$
3ow le!el of consumer awareness$
Persuade benefits of competing brand$
2.14 F"t"r% ro/t' $ros$%+t"s#
Ehee production !arious %uantities li+e >:: ::: "3 and = +g Tins$
*dditional ;: "T metric tone. production plant will be establish$
,isco!ering new mar+eting areas$
7xport the product$
&ntroduce sterili0es fla!our mil+$
,airy weightiness$
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THE STUDY ON MARGINAL COSTING
&ntroduce !alue added product$
2.11 FINANCIAL STATEMENT#
BALANCE SHEET AS ON (1(241:
3&*#&3&T&7S 1:241( to
(1(241:
1:241( to
(1(241:
*SS7TS 1:241( to
(1(241:
1:241( t
(1(241
C&$it&l &+ Fi%! Ass%ts# ?19219>=9:
Lo&s 5Li&,ility6 (=9?94=91(= ?apital wor+-in-
progress
;>;I>=I
Secured loans ;:9F>DF>>
C"rr%t Li&,iliti%s Tetra Pac+-Plant
"achinery
=I99J:F@9149:?
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THE STUDY ON MARGINAL COSTING
4utstanding
3iability
;II>=IJ ?losing Stoc+ JF=JI9JD
Salary /eco!eries ;:;9
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THE STUDY ON MARGINAL COSTING
C"rr%t li&,iliti%s 29=>9>@9>>= ,epreciation
reser!e
>F=I:D=JIID=: C"rr%t &ss%ts 1294>94?9??
7", and security
deposits
I>>:=F
?losing IJ;>I;
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THE STUDY ON MARGINAL COSTING
THEORETICAL BAC7ROUND OF THE STUDY(.1 BAC7ROUND OF THE STUDY
"arginal costing as one of the tools of management accounting helps management in ma+ing
certain decisions$ &t pro!ides management with information regarding the beha!iour of cost and be
incidence of such costs on the profitability of an underta+ing marginal costing is defined as 'the
ascertainment of marginal costs and of the effect on profit of changes in !olume or type of output by
differentiating between fixed costs and !ariable costs($ "arginal costing is not a separate costing it is
only techni%ue used by accountants to aid management decision$ &t is also called as ',irect costing(
in )S* this techni%ue of costing is also +nown as '2ariable costing( ',ifferential costing or 4ut-of-
costing($
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THE STUDY ON MARGINAL COSTING
*ccording to ?&"* terminology( marginal costing is the ascertainment of marginal costs and
of the effect on profit of changes in !olume or type of output by differentiating between fixed costs
and !ariable cost in this techni%ue of coasting only !ariable costs are charged to operation processes
or products lea!ing all indirect costs to be written off against profits in the period in which they arise($
Thus marginal costing is the accounting system in which !ariable costs is charged to cost
units and fixed costs of the period are written off in full against the aggregate contribution$ &t special
!alue is in decision ma+ing$ &t is a techni%ue of applying the existing methods in a manner in order to
bring out the relationship between profit and !olume of output$
Meaning of marginal costM&ri&l Cost# The term "arginal ?ost refers to the amount at any gi!en !olume of output by which
the aggregate costs are charged if the !olume of output is changed by one unit$ *ccordingly it means
that the added or additional cost of an extra unit of output$"arginal cost may also be defined as the Ucost of producing one additional unit of product$U Thus the
concept marginal cost indicates where!er there is a change in the !olume of outputK certainly there
will be some change in the total cost$ &t is concerned with the changes in !ariable costs$ 8ixed cost is
treated as a period cost and is transferred to Profit and 3oss *ccount$
M&ri&l Costi#
"arginal ?osting may be defined as Uthe ascertainment by differentiating
#etween fixed cost and !ariable cost of marginal cost and of the effect on profit of changes in !olume
or type of output$U 5ith marginal costing procedure costs are separated into fixed and !ariable cost$
*ccording to A$ #atty "arginal costing is Ua techni%ue of cost accounting pays special attention to the
beha!iour of costs with changes in the !olume of output$U This definition lays emphasis on the
ascertainment of marginal costs and also the effect of changes in !olume or type of output on the
companyVs profit$
(.2 FEATURES OF MARINAL COSTIN
?osts are separated in to the fixed and !ariable elements and semi !ariable costs are
also differentiated li+ewise$
4nly the !ariable costs are ta+en in to account for computing the !alue if stoc+s of
wor+ in progress and finished products$ 8ixed costs are charged off to re!enue wholly during the period in which they are
incurred and are not ta+en in to account for !aluing product cost1in!entories$
Process may be based on marginal costs and contribution but in normal circumstances
prices would co!er costs in total$
&t combines the techni%ue of cost recording and cost reporting$
Profitability of departments or products in determined in items of marginal
contribution$
The unit of a product means the a!erage !ariable costs of manufacturing the product$
*ll elements of costs are classified into fixed and !ariable costs$
"arginal costing is a techni%ue of cost control and decision ma+ing$
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THE STUDY ON MARGINAL COSTING
2ariable costs are charged as the cost of production$
2aluation of stoc+ of wor+ in progress and finished goods is done on the basis of
!ariable costs$
Profit is calculated by deducting the fixed cost from the contribution i$e$ excess of
selling price o!er marginal cost of sales$
Profitability of !arious le!els of acti!ity is determined by cost !olume profit analysis$
;$; *,2*NT*E7S 48 "*/E&N*3 ?4ST&NE
?ost-!olume profit relationship data wanted for profit planning purpose is readily
obtained from the regular accounting statements$ Hence management does not ha!e to
wor+ with two separate set of data to the other$ The profit for a period is not affected by charges in absorption of fixed expenses
resulting from building or reducing in!entory$ 4ther things reaming e%ual e$g$
selling prices costs sales mix.
Practical cost control is greatly facilitated $by a!oiding arbitrary allocation sof fixed
o!erheads efforts can be concentrated on maintaining a uniform and consistent
marginal cost useful to the !arious le!els of management$
"arginal costing is simple to understand and operateK it can be combined with other
forms of costing such as budgetary costing standard costing without much difficulty$ &n marginal costing fixed o!erheads are not charged to the cost of production due to
this the effect of !arying charges per unit is a!oided$
&t helpsin short-term profit planning by brea+-e!en charts and profit graphs$
?omparati!e profitability can be easily assessed and brought to the notice of the
management for decision-ma+ing$
&t pre!ents the illogical carry-forward in stoc+-!aluation of some proportion of current
years fixed o!erheads$
&t eliminates large balances left in o!erheads control accounts which indicate thedifficulty of ascertaining an accurate o!erheads reco!ery rte$
"anufacturing cost and income statement in the direct costing is in use$
Shutdown or continue decisions or alternati!e use of production facilities$
/etain or replace a machine$
,ecisions as to whether to sell in the export mar+et or in the home mar+et$
The effect of alternati!e sales or production policies can be more readily appreciated
and assessed and decisions ta+en will yield the maximum return to the business$
5hether to expand or contract$
Product mix decisions li+e for example O Selection of optimal product mixK
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THE STUDY ON MARGINAL COSTING
Product substitutionK
Product discontinuance$
#rea+-7!en *nalysis$
(.: Li*it&tios of M&ri&l Costi
&t may be !ery difficult to segregation of all costs into fixed and !ariable costs$
"arginal ?osting techni%ue cannot be suitable for all type of industries$ 8or example
it is difficult to apply in ship-building contract industries etc$
The elimination of fixed o!erheads leads to difficulty in determination of selling
price$
&t assumes that the fixed costs are controllable but in the long run all costs are
!ariable$
"arginal ?osting does not pro!ide any standard for the e!aluation of performance
which is pro!ided by standard costing and budgetary control$
5ith the de!elopment of ad!anced technology fixed expenses are proportionally
increased$ Therefore the exclusion of fixed cost is less effecti!e$
)nder marginal costing elimination of fixed costs results in the under !aluation of
stoc+ of wor+ in progress and finished goods$ &t will reflect in true profit$
"arginal ?osting focuses its attention on sales aspect$ *ccordingly contribution and
profits are determined on the basis of sales !olume$ &t does not consider other
functional aspects$
)nder "arginal ?osting semi !ariable and semi fixed costs cannot be segregated
accurately$
&t is !ery difficult to segregate all costs into fixed and !ariable costs !ery clearly since
all costs are !ariable in the long run$ Hence such segregation sometimes may gi!e
misleading results$
The closing stoc+ consists of !ariable costs only and ignores fixed costs$ This gi!es
distorted picture of profits$
Semi-!ariable costs are not considered in the analysis$
There is problem of under or o!er-reco!ery of o!erheads$ Since !ariable costs are
apportioned on estimated basis and not on the actual$
Since the time factor is completely ignoredK comparison of performance between two
periods on the basis of contribution alone will gi!e the misleading results$
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THE STUDY ON MARGINAL COSTING
(.= COST ;OLUME PROFIT ANALYSIS
?ost 2olume Profit *nalysis ? 2 P. is a systematic method of examining the relationship between
changes in the !olume of output and changes in total sales re!enue expenses costs. and net profit$ ¬her words$ &t is the analysis of the relationship existing amongst costs sales re!enues output and
the resultant profit$
?2P analysis expands the use of information pro!ided by brea+-e!en analysis$ * critical part of ?2P
analysis is the point where total re!enues e%ual total costs both fixed and !ariable costs.$ *t this
brea+-e!en point a company will experience no income or loss$ This brea+-e!en point can be an
initial examination that precedes more detailed ?2P analysis$
?2P analysis employs the same basic assumption as in brea+e!en analysis$ The assumptions
underlying ?2P analysis areKThe beha!iour of both costs and re!enues is linear throughout the rele!ant range of acti!ity$ This
assumption precludes the concept of !olume discounts on either purchase materials or sales.
?osts can be classified accurately as either fixed or !ariable$
?hanges in acti!ity are the only factors that affect costs$
5hen a company sells more than one type of product the product mix the ratio of each product to
total sales. will remain constant$
The components of ?2P analysis areK
3e!els or !olume of acti!ity
)nit selling prices
2ariable cost per unit Total fixed costs
To +now the cost !olume and profit relationship a study of the following is essentialO
>. "arginal ?ost 8ormula
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THE STUDY ON MARGINAL COSTING
?&"*s defined as 'the study of the effects on future profit changes in fixed cost$ 2ariable costs sales
price %uantity and mix$
The cost-!olume-profit ?2P. analysis helps management in finding out the relationship of costs and
re!enues to profits the aim of an understanding is to earn profits$ Profit depends upon a large number
of factors$ The most important of which are the cost manufacture and the !olume of sales effected$
#oth these factors are interdependent-!olume of sales depends upon the !olume production$ 5hich in
turn is related to costsC ?ost again is the resultant of the operation of a number of !arying factors$
Such factors affecting costs areK
>$ 2olume of production
. ?ost !olume is a powerful tool for decision ma+ing$
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THE STUDY ON MARGINAL COSTING
or.
Sales - 2ariable ?ost X ?ontribution
?ontribution X 8ixed ?ost Profit
The abo!e e%uation brings the fact that in order to earn profit the contribution must be more than
fixed expenses$ To a!oid any loss the contribution must be e%ual to fixed cost$
(.? Cotri,"tio#
The term ?ontribution refers to the difference between Sales and "arginal ?ost of Sales$ &t also
termed as UEross "argin$U ?ontribution enables to meet fixed costs and profit$ Thus contribution will
first co!ered fixed cost and then the balance amount is added to Net profit$ ?ontribution can be
represented asO
?ontribution X Sales - "arginal ?ost
?ontribution X Sales - 2ariable ?ost
?ontribution X 8ixed 7xpenses Profit
?ontribution - 8ixed 7xpenses X Profit
Sales - 2ariable ?ost X 8ixed ?ost Profit
?XS-2$?
?X8$?P
S-2$?X8$?P
?-8$?XP
>$ Selling price containing profitO
?ontribution X 8ixed cost Profit
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THE STUDY ON MARGINAL COSTING
?ontribution X 8ixed loss
(.@ Br%&k8E)% A&lysis#
#rea+-7!en *nalysis is also called ?ost 2olume Profit *nalysis$ The term #rea+-7!en *nalysis is
used to measure interrelationship between costs !olume and profit at !arious le!el of acti!ity$ *
concern is said to brea+-e!en when its total sales are e%ual to its total costs$ &t is a point of no profits
no loss$ This is a point where contribution is e%ual to fixed cost$ &n other words the brea+-e!en point
where income is e%ual to expenditure Zor. total sales e%ual to total cost$
The brea+-e!en point can be calculated by the following formulaO
#rea+-7!en Point in )nits
;$I *SS)"PT&4N )N,7/3@&NE #/7*6-727N-*N*3@S&S
The brea+-e!en-analysis is based on the following assumptions
>$ The cost and re!enues functions are linear functions$ This is for the
:$ The costs are made up of fixed and !ariable costs$
>>$ There is only one product or in the case of multiple products the sales mix does
not change$ &n other words when se!eral products are being sold the sale of
!arious products will always be in some predetermined proportion$
>;$ There will be no change in the general price le!el$
;$I STATEMENT OF PROFIT
Particulars amount
Sales WWW
3essO-2ariable cost WWW
?ontribution WWW
3essO- 8ixed cost WWW
Profit WWW
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THE STUDY ON MARGINAL COSTING
Sales X Total cost Profit X 2ariable cost 8ixed cost Profit
Total ?ost X 2ariable cost 8ixed cost
2ariable cost /atio X Z2ariable cost 1 Sales[ W >::
Sales G 2ariable cost X 8ixed cost Profit
?ontribution X Sales W P12 /atio
(.14 PROFIT ;OLUME RATIO P; RATIO#8
The ratio or percentage of contribution margin to sales is +nown as P12 ratio$ This ratio is
also +nown as marginal income ratio$ ?ontribution to sales ratio$ P12 ratio usually expressed
as a percentage is the rate at which profit increases with the increase in !olume$ The formula
for P12 ratioK
>$ Z?ontribution 1 Sales[ W >::
::
;$ Z?hange in profit 1 ?hange in sales[ W >::
9$ Z?hange in contribution 1 ?hange in sales[
(.11 SINIFICANCE OF PROFIT ;OLUME 5P;6 RATIO
Profit !olume ratio is a logical extension of marginal costing$ &t is study of the
interrelationship of cost beha!iour patterns le!els of acti!ity and the profit that result from
each alternati!e combination$ The significance of profit !olume ratio may enumerate from the
following application which are as underK
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THE STUDY ON MARGINAL COSTING
*scertainment of profit on a particular le!el of sales !olume$
,etermination of brea+ e!en profit$
?alculation of sales re%uired to earn a particular le!el of profit$
7stimation of the !olume of sales re%uired to maintain the present le!el of profit in
case selling prices are not to be reduced by as stipulated margin$
)seful in de!eloping flexible budget for costs for decisions relating to pricing$
6eeping or dropping product lines$ *ccepting or rejecting particular order$ "a+e or
buy decision sales mix planning altering plant layout channels of distribution
specification promotional acti!ities etc$$ 7!aluation of the impact of costs factors on profit$
(.12 BREA7 E;EN POINT BEP#8
>$ 8ixed cost 1 ?ontribution per unit \in units]
$ Profit planning
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THE STUDY ON MARGINAL COSTING
I$ Problem of +ey factor
>:$ Selection of suitable product mix
(.1: MARIN OF SAFETY MOP
* principle of in!esting in which an in!estor only purchases securities when the mar+et price
is significantly below its intrinsic !alue$ &n other words when mar+et price is significantly
below your estimation of the intrinsic !alue the difference is the margin of safety$ This
difference allows an in!estment to be made with minimal downside ris+$
"argin of safety is a concept used in many areas of life not just finance$ 8or example
consider engineers building a bridge that must support >:: tons of traffic$ 5ould the bridge
be built to handle exactly >:: tons probably not$ &t would be much more prudent to build the
bridge to handle say >;: tons to ensure that the bridge wills no collapse under a hea!y load$
"4S X budgeted sales G brea+-e!en sales
"argin of safety is used in brea+-e!en analysis to indicate the amount of sales that are abo!e
the brea+-e!en point
>$ *ctual sales G #rea+ e!en sales
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THE STUDY ON MARGINAL COSTING
4perating le!erages X contribution17#&T
?ombined le!erages X contribution17#T
Trends analysis
The income statement discloses net profit or net loss on account of operations$ * comparati!e
income statement will show the absolute figures for two or more periods$ The absolute
change from one period to another and if desired$ The change in terms of percentages$ Since
the figure for two or more periods are shown side the reader can %uic+ly ascertain whether
sales ha!e increased whether cost of sales has increased or decreased ect$$
@XaXbx.
"argin of safety is calculated as followsK
"argin of safety X total sales- brea+ e!en sales
"argin of safety can also be calculated with the help of P12 ratioK
"argin of safety X profit1 profit !olume
"argin of safety can also be expressed as percentage of salesK
"argin of safety1total salesW>::
(.1> Profit ;ol"*% R&tio PI ; R&tio6G
Profit 2olume /atio is also called as ?ontribution Sales /atio or. "arginal &ncome /atio or.
2ariable Profit /atio$ &t is used to measure the relationship of contribution the relati!e profitability of
different products$ Processes or departments$ &t also measures the rate of change of profit due to
change in !olume of sales$ &ts fundamental property is that if per unit sales price and !ariable cost areconstant then P12 ratio will be constant at all the le!els of acti!ities $ a change is fixed cost does not
affect P12 ratio$
(.1@ Us%s of +osts8)ol"*%8$rofit &&lysis
a. ?2P analysis helps in forecasting costs and profits as a result of change in !olume$
b. &t helps fixing a sales !olume le!el to earn or co!er gi!en re!enue return on capital
employed or rate of di!idend$
c. &t assist determination of effect of change in !olume due to plant expansion or
acceptance of an order with or without increase in costs or in order or in other wordsa %uantum of profit to be obtained with changes in !olume of sales$
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THE STUDY ON MARGINAL COSTING
d. Through cost !olume-profit analysis inter-firm comparison of profitability can be
done intelligently$
e. ?$2$P analysis helps in determination relati!e profitability of each product line
project or profit plan$
f. &t helps in determining cash re%uirement at a desired !olume of output with the help
of cash brea+ e!en charts$
g. #rea+ e!en analysis emphasi0es the importance of capacity utili0ation for achie!ing
economy$
h. 8rom brea+ e!en analysis during ser!e recession the comparati!e effects of a shut
down or continued operation at a loss is indicated$
i. The effect on total cost of a change in the fixed o!er-head is more clearly
demonstrated through brea+-e!en analysis and cost-!olume profit charts$j. The condition of a business such as profit potentials re%uirements of capital financial
stability and incidence of fixed and !ariable costs can be gauged from a study of the
position of the brea+-e!en point and angle of incidence in the brea+-e!en chart$
(.1@ *&ri of %"&tio
Sales cost X profit
4r sales-fixed cost !ariable cost. Xprofit
4r sales-!ariable cost X fixed cost profit
S-2 X8-P
5here
SXsales
2X!ariable
8Xfixed cost
PXprofit
"ethods for determining brea+ e!en points
The sales !olume which e%uation total re!enue with related costs and results in profit
or loss is called brea+-e!en point #7P. brea+-e!en point can be determined by the following
methodsK
>$ *lgebraic method
a$ ?ontribution margin approach
b$ 7%uation techni%ue
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THE STUDY ON MARGINAL COSTING
>$ *lgebraic method
a$ ?ontribution margin approach
#rea+-e!en point in units. X total fixed costs1selling price per unit-
!ariable cost per unit
4r X total fixed costs1contribution per unit
#rea+-e!en point in /s. X fixed cost1 profit !olume ratio
4rX brea+-e!en points units.Wselling price per unit