Description
cost of marginal costing and absorbtion costing. It also explains the difference between contribution and profit. What is breakeven point and how is it calculated.
Marginal Costing
Marginal costing
It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost
Absorption costing
It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs
Marginal Costing Cost Manufacturing cost Direct Materials Direct Labour Variable Overheads Non-manufacturing cost Fixed overhead
Period cost
Finished goods
Cost of goods sold
Profit and loss account
Absorption Costing
Cost Manufacturing cost Direct Materials Direct Labour Non-manufacturing cost Overheads
Finished goods
Cost of goods sold
Period cost
Profit and loss account
Assumption of Marginal Costing
i. All elements of cost – production, administration & selling & distribution – can be segregate into variable cost & fixed cost ii. Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuate directly in proportion to change in the volume of output iii. The selling price per unit remain unchanged or constant at all levels of activities. iv. The fixed cost remain unchanged or constant for the entire volume of production v. The volume of production or output is the only factor which influence the costs.
Marginal Costing Equation
Sales – Variable Cost = Fixed Cost + profit
CONTRIBUTION
Contribution is the difference between sales and Variable cost or Marginal cost Contribution being the excess of sales over variable cost is the amount that is Contributed towards fixed expenses and profits
Difference between Contribution & Profit
Contribution Includes fixed cost and profit Based on Marginal Cost Concept Contribution above Break even contribute to profits Contribution analysis required a knowledge of Break even concept
Profit Does not include fixed cost Based on common man concept Profit is expected only after covering variable & fixed cost Profit does not required any such concept
Advantages of Contribution
i. ii. iii. iv. It helps the management in the fixation of selling price It assist in determining the break even point It helps management in the selection of a suitable product mix for profit maximisation It helps in choosing from among alternative methods of production, the method which gives highest contribution per limiting factor is adopted v. It helps the management in deciding whether to purchase or manufacture a product or a component vi. It helps in taking a decision as regards to adding a new product in the market
Q1.Using marginal costing technique calculate the profit earned during the year
Fixed Cost Variable Cost Selling Price Output level Rs. 250,000 Rs 10 per unit Rs.15 per unit 75000 units
Q2. Determine the fixed expenses using marginal costing technique
Sales Rs. 2,40000 Direct Material Rs 80000 Direct Labour Rs. 50,000 Variable overheads Rs. 20000 Profit Rs 50,000
Profit Volume Ratio
The Profit Volume Ratio expresses the relationship of contribution to sales
PV ratio =
Contribution
or
Sales – Variable cost Sales
Or
Sales
PV ratio =
Change in Profit or Contribution Change in Sales
The Profit/volume Ratio is one of the most important ratios for studying the profitability Of operations of a business and establishes the relationship between contribution & sales For example if PV ratio is 20% it means that for a sale of every Rs.100 will bring a profit Of 20% after fixed expenses are met. Comparison of P/V ratio for different products can be made to find out which product Is more profitable. Higher the P/V ratio more will be the profit.
P/V ratio is very useful and is used for the calculation of: i. Break even Point i.e. Fixed Cost / PV ratio ii. Value of sale to earn a desire amount of Profits
Sale =
Fixed Cost + Desire Profit PV Ratio
iii. Profit = (sales x PV ratio) – Fixed Cost
iv. Fixed Cost = (sales x PV ratio) - Profits
v. Margin of Safety = Profit PV Ratio
Question Calculate P/V ratio from the following information i. Given; selling price Rs 10 per unit, variable Cost per unit Rs 6 ii. Give the profits and sales of two period as under Sales Rs 1,50,000 1,70,000 Profits Rs 20,000 25,000
2000 2001
Break Even Point
Breakeven analysis is also known as cost-volume profit analysis Breakeven analysis is the study of the relationship between selling prices, sales volumes, fixed costs, variable costs and profits at various levels of activity
Application • Breakeven analysis can be used to determine a company’s breakeven point (BEP) • Breakeven point is a level of activity at which the total revenue is equal to the total costs • At this level, the company makes no profit
Assumption of breakeven point analysis
• Relevant range – The relevant range is the range of an activity over which the fixed cost will remain fixed in total and the variable cost per unit will remain constant • Fixed cost – Total fixed cost are assumed to be constant in total • Variable cost – Total variable cost will increase with increasing number of units produced • Sales revenue – The total revenue will increase with the increasing number of units produced
A business is said to be at break even when its total sales are equal to its costs.
It is point of no profit no loss
At this point, contribution is equal to fixed cost.
A concern which attain break even point at less number of units will definitely be better from another concerned where break even point is achieved at more units of production
Formula for calculation of Break Even Point Total Fixed Expenses Contribution per unit
Break Even Point (in Units) =
Break Even Point (in Rupee) =
Fixed Cost
PV Ratio
Question From the following particulars calculate i. Contribution ii. PV Ratio iii. Break even point in units & in Rupee iv. What will be the selling price per unit if the BEP is brought down to 25000 units? Fixed Expenses Variable Cost per Unit Selling Price Rs 150,000 Rs 10 Rs 15
doc_113939806.pptx
cost of marginal costing and absorbtion costing. It also explains the difference between contribution and profit. What is breakeven point and how is it calculated.
Marginal Costing
Marginal costing
It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost
Absorption costing
It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs
Marginal Costing Cost Manufacturing cost Direct Materials Direct Labour Variable Overheads Non-manufacturing cost Fixed overhead
Period cost
Finished goods
Cost of goods sold
Profit and loss account
Absorption Costing
Cost Manufacturing cost Direct Materials Direct Labour Non-manufacturing cost Overheads
Finished goods
Cost of goods sold
Period cost
Profit and loss account
Assumption of Marginal Costing
i. All elements of cost – production, administration & selling & distribution – can be segregate into variable cost & fixed cost ii. Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuate directly in proportion to change in the volume of output iii. The selling price per unit remain unchanged or constant at all levels of activities. iv. The fixed cost remain unchanged or constant for the entire volume of production v. The volume of production or output is the only factor which influence the costs.
Marginal Costing Equation
Sales – Variable Cost = Fixed Cost + profit
CONTRIBUTION
Contribution is the difference between sales and Variable cost or Marginal cost Contribution being the excess of sales over variable cost is the amount that is Contributed towards fixed expenses and profits
Difference between Contribution & Profit
Contribution Includes fixed cost and profit Based on Marginal Cost Concept Contribution above Break even contribute to profits Contribution analysis required a knowledge of Break even concept
Profit Does not include fixed cost Based on common man concept Profit is expected only after covering variable & fixed cost Profit does not required any such concept
Advantages of Contribution
i. ii. iii. iv. It helps the management in the fixation of selling price It assist in determining the break even point It helps management in the selection of a suitable product mix for profit maximisation It helps in choosing from among alternative methods of production, the method which gives highest contribution per limiting factor is adopted v. It helps the management in deciding whether to purchase or manufacture a product or a component vi. It helps in taking a decision as regards to adding a new product in the market
Q1.Using marginal costing technique calculate the profit earned during the year
Fixed Cost Variable Cost Selling Price Output level Rs. 250,000 Rs 10 per unit Rs.15 per unit 75000 units
Q2. Determine the fixed expenses using marginal costing technique
Sales Rs. 2,40000 Direct Material Rs 80000 Direct Labour Rs. 50,000 Variable overheads Rs. 20000 Profit Rs 50,000
Profit Volume Ratio
The Profit Volume Ratio expresses the relationship of contribution to sales
PV ratio =
Contribution
or
Sales – Variable cost Sales
Or
Sales
PV ratio =
Change in Profit or Contribution Change in Sales
The Profit/volume Ratio is one of the most important ratios for studying the profitability Of operations of a business and establishes the relationship between contribution & sales For example if PV ratio is 20% it means that for a sale of every Rs.100 will bring a profit Of 20% after fixed expenses are met. Comparison of P/V ratio for different products can be made to find out which product Is more profitable. Higher the P/V ratio more will be the profit.
P/V ratio is very useful and is used for the calculation of: i. Break even Point i.e. Fixed Cost / PV ratio ii. Value of sale to earn a desire amount of Profits
Sale =
Fixed Cost + Desire Profit PV Ratio
iii. Profit = (sales x PV ratio) – Fixed Cost
iv. Fixed Cost = (sales x PV ratio) - Profits
v. Margin of Safety = Profit PV Ratio
Question Calculate P/V ratio from the following information i. Given; selling price Rs 10 per unit, variable Cost per unit Rs 6 ii. Give the profits and sales of two period as under Sales Rs 1,50,000 1,70,000 Profits Rs 20,000 25,000
2000 2001
Break Even Point
Breakeven analysis is also known as cost-volume profit analysis Breakeven analysis is the study of the relationship between selling prices, sales volumes, fixed costs, variable costs and profits at various levels of activity
Application • Breakeven analysis can be used to determine a company’s breakeven point (BEP) • Breakeven point is a level of activity at which the total revenue is equal to the total costs • At this level, the company makes no profit
Assumption of breakeven point analysis
• Relevant range – The relevant range is the range of an activity over which the fixed cost will remain fixed in total and the variable cost per unit will remain constant • Fixed cost – Total fixed cost are assumed to be constant in total • Variable cost – Total variable cost will increase with increasing number of units produced • Sales revenue – The total revenue will increase with the increasing number of units produced
A business is said to be at break even when its total sales are equal to its costs.
It is point of no profit no loss
At this point, contribution is equal to fixed cost.
A concern which attain break even point at less number of units will definitely be better from another concerned where break even point is achieved at more units of production
Formula for calculation of Break Even Point Total Fixed Expenses Contribution per unit
Break Even Point (in Units) =
Break Even Point (in Rupee) =
Fixed Cost
PV Ratio
Question From the following particulars calculate i. Contribution ii. PV Ratio iii. Break even point in units & in Rupee iv. What will be the selling price per unit if the BEP is brought down to 25000 units? Fixed Expenses Variable Cost per Unit Selling Price Rs 150,000 Rs 10 Rs 15
doc_113939806.pptx