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Marginal Costing And Break Even Analysis Pdf

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What Is the Break-Even Point?

Are Marginal Costs Fixed or Variable Costs?

Marginal Costing and Cost Volume Profit Analysis Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product. It is concerned with the changes in variable costs.

Fixed cost is treated as a period cost and is transferred to Profit and Loss Account. Marginal Costing: Marginal Costing may be defined as "the ascertainment by differentiating between fixed cost and variable cost, of marginal cost and of the effect on profit of changes in volume or type of output.

According to J. Batty, Marginal costing is "a technique of cost accounting pays special attention to the behaviour of costs with changes in the volume of output. All elements of costs are classified into fixed and variable costs. Marginal costing is a technique of cost control and decision making. Variable costs are charged as the cost of production. Valuation of stock of work in progress and finished goods is done on the basis of variable costs.

Profit is calculated by deducting the fixed cost from the contribution, i. Profitability of various levels of activity is detennined by cost volume profit analysis. It is a technique of cost ascertainment. Under this method both fixed and variable costs are charged to product or process or operation. Accordingly, the cost of the product is determined after considering both fixed and variable costs. Under Absorption Costing all fixed and variable costs are recovered from production while under Marginal Costing only variable costs are charged to production.

Under Absorption Costing valuation of stock of work in progress and finished goods is done on the basis of total costs of both fixed cost and variable cost. While in Marginal Costing valuation of stOl! Absorption Costing focuses its attention on long-term decision making while under Marginal Costing guidance for short-term decision making.

Absorption Costing lays emphasis on production, operation or process while Marginal Costing focuses on selling and pricing aspects. Differential Costing is a technique useful for cost control and decision making. Differential Costing can be made in the case of both Absorption Costing as well as Marginal Costing While Marginal Costing excludes the entire fixed cost, some of the fixed costs may be taken into account as being relevant for the purpose of Differential Cost Analysis.

Marginal Costing may be embodied in the accounting system whereas Differential Cost are worked separately as analysis statements. In Marginal costing, margin of contribution and contribution ratios are the main yardstick for the performance evaluation and for decision making. In Differential Cost Analysis. Advantages of Marginal Costing or Important Decision Making Areas of Marginal Costing The following are the important decision making areas where marginal costing technique is used : I Pricing decisions in special circumstances : a Pricing in periods of recession; b Use of differential selling prices.

Acceptance of offer and submission of tenders. Make or buy decisions. Shutdown or continue decisions or alternative use of production facilities. Retain or replace a machine. Decisions as to whether to sell in the export market or in the home market.

Change Vs status quo. Whether to expand or contract. Product mix decisions like for example : a Selection of optimal product mix; b Product substitution; c Product discontinuance. It may be very difficult to segregation of all costs into fixed and variable costs.

For example, it is difficult to apply in ship-building, contract industries etc. The elimination of fixed overheads leads to difficulty in determination of selling price. It assumes that the fixed costs are controllable, but in the long run all costs are variable.

Marginal Costing does not provide any standard for the evaluation of performance which is provided by standard costing and budgetary control. With the development of advanced technology fixed expenses are proportionally increased. Therefore, the exclusion of fixed cost is less effective.

Under marginal costing elimination of fixed costs results in the under valuation of stock of work in progress and finished goods. It will reflect in true profit. Marginal Costing focuses its attention on sales aspect. Accordingly, contribution and profits are determined on the basis of sales volume.

It does nnt conider other functional aspects. Under Marginal Costing semi variable and semi fixed costs cannot be segregated accurately. In other words. To know the cost, volume and profit relationship, a study of the following is essential : 1. Objectives of Cost Volume Profit Analysis The following are the important objectives of cost volume profit analysis: 1 2.

Cost volume is a powerful tool for decision making. It makes use of the principles of Marginal Costing. It enables the management to establish what will happen to the financial results if a specified level of activity or volume fluctuates. It helps in the determination of break-even point and the level of output required to earn a desired profit. The PN ratio serves as a measure of efficiency of each product, factory, sales area etc.

It helps us to forecast the level of sales required to maintain a given amount of profit at different levels of prices. To avoid any loss, the contribution must be equal to fixed cost. It also termed as "Gross Margin.

Thus, contribution will first covered fixed cost and then the balance amount is added to Net profit. Illustration: 1 From the following information, calculate the amount of profit using marginal cost technique: Fixed cost Rs.

The term Break-Even Analysis is used to measure inter relationship between costs, volume and profit at various level of activity. A concern is said to break-even when its total sales are equal to its total costs. It is a point of no profit no loss. This is a point where contribution is equal to fixed cost. The break-even point can be calculated by the following formula:. From the following particulars find out break-even point: Fixed Expenses Rs.

It is used to measure the relationship of contribution, the relative profitability of different products. Illustration: 4 Sales Rs. If the selling price is Rs. Illustration: 6 MNP Ltd. Each bar sells for Rs. The variable cost for each bar sugar, chocolate, almonds, wrapper, labour total Rs. The total fixed cost are Rs.

During the year, 10,00, bars were sold. The sales manager is confident that an advertising campaign could double sales volume. Assume that the company improves the quality of its ingredients, thus increasing variable cost to Rs. Answer the following questions: a How much the selling price be increased to maintain the same break-even point? The company has decided to increase its selling price to Rs. The sales volume drops from 10,00, to 8,00, bars.

Was the decision to increase the price a good one? Compute the sales volume that would be needed at the new price for the company to earn the same profit at last year. The sales manager is convinced that by improving the quality of ingredients increasing variable cost to Rs. He has also indicated that a price increase would not affect the. Is the sales manager's plan feasible? What selling price would you choose?

Contribution Rs. The decision seems to be good one as operating profit has increased from Rs. S Yes, Sales manager's plan seems feasible As price increase of to achieve desired profit but the caveat is : l. Illustration: 7 A Company manufactures a single product with a capacity of 1,50, units per annum. The summarized profitability statement for the year is as under: Rs. There is an offer from a large retailer for purchasing 30, units per annum, subject to providing a packing with a different brand name at a cost of Rs.

However, in this case there will be no selling and distribution expenses. Also this will not, in any way, affect the company's existing business. What be the break-even price for this additional offer.? If an expenditure of Rs.

If the selling price is reduced by Rs. Will the reduction in selling price be justified?

Chapter 15 – Cost-volume Profit (CVP) Analysis and Break-Even Point

Marginal Costing and Cost Volume Profit Analysis Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product. It is concerned with the changes in variable costs. Fixed cost is treated as a period cost and is transferred to Profit and Loss Account. Marginal Costing: Marginal Costing may be defined as "the ascertainment by differentiating between fixed cost and variable cost, of marginal cost and of the effect on profit of changes in volume or type of output. According to J.


Marginal Costing is not a method of costing like job, batch or contract costing. Break-even analysis is a widely used technique to study cost-volume-profit.


Chapter 26 Marginal Costing and Cost Volume Profit Analysis

CVP analysis looks at the effect of sales volume variations on costs and operating profit. The analysis is based on the classification of expenses as variable expenses that vary in direct proportion to sales volume or fixed expenses that remain unchanged over the long term, irrespective of the sales volume. Accordingly, operating income is defined as follows:.

It helps in determining the point of production at which revenue equals the costs. Break-even analysis is also called as profit contribution analysis. According to Charles T. It is the point of zero profit and zero loss. The important aspect of understanding break-even analysis is the break-even point at which there is no net loss or gain of an organization as expenses equals revenue.

Let us make an in-depth study of the meaning, assumptions, uses and limitations of break-even point. Break-even point represents that volume of production where total costs equal to total sales revenue resulting into a no-profit no-loss situation. If output of any product falls below that point there is loss; and if output exceeds that point there is profit. Thus, it is the minimum point of production where total costs are recovered. Therefore, at break-even point.

Break-Even Point: Meaning, Assumptions, Uses and Limitations

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Every business organization works to maximize its profits. With the help of CVP analysis, the management studies the co-relation of profit and the level of production. CVP analysis is concerned with the level of activity where total sales equals the total cost and it is called as the break-even point. In other words, we study the sales value, cost and profit at different levels of production. CVP analysis highlights the relationship between the cost, the sales value, and the profit. Sales volume does not affect the selling price of the product. We can assume the selling price as constant.

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