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LESSON
11
MARGINAL COSTING
CONTENTS
11.0 Aims and Objectives
11.1 Introduction
11.2 Meaning & Definition of Marginal Costing
11.3 Why Marginal Cost is called as Incremental Cost?
11.4 Why Marginal Cost is called in other words as Variable Cost?
11.4.1 Fixed Cost
11.4.2 Variable Cost
11.4.3 Semi-variable Cost
11.4.4 Method of Difference
11.4.5 Method of Coverages
11.5 Break Even Point Analysis
11.5.1 Break Even Point in Units
11.6 Verification
11.6.1 Selling Price Method
11.6.2 PV Ratio Method
11.6.3 Graph Method
11.7 Margin of Safety
11.8 Determination of Sales Volume in Rupees at Desired Level of Profit
11.9 Applications of Marginal Costing
11.9.1 Make or Buy Decision
11.9.2 Worth of Production
11.9.3 Worth of Purchase
11.10 Accepting the Export Offer
11.11 Key Factor
11.12 Selecting the Suitable Product Mix
11.13 Determining Optimum Level of Operations
11.14 Alternative Method of Production
11.15 Let us Sum up
11.16 Lesson-end Activity
11.17 Keywords
11.18 Questions for Discussion
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Marginal Costing
In this lesson we shall discuss about marginal costing. After going through this lesson
you will be able to:
(i)
(ii)
(iii) discuss applications of marginal costing and selecting the suitable product mix.
11.1 INTRODUCTION
It is one of the premier tools of management not only to take decisions but also to fix an
appropriate price and to assess the level of profitability of the products/services. This is
a only costing tool demarcates the fixed cost from the variable cost of the product/
service in order to guide the firm to know the minimal point of sales to equate the cost of
production. It is a tool of analysis highlighting the relationship in between the cost, volume
of sales and profitability of the firm.
C
Rs. 10
Change (Increase) in the total cost of production
=
=
U
1
Change (Increase) in the level of production
= Rs. 10
If the same firm reduces the total volume from 100 units to 99 units. The total cost of
production Rs. 990.
Decrease in the Level of production and Cost of production:
Marginal Cost =
C
Rs.10
Change(Decrease) in the total cost of production
=
=
U
1
Change(Increase) in the level of production
= Rs. 10
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Units
Fixed
Cost
Rs
Fixed cost
per unit
Rs
Variable
Cost
Rs
Variable
Cost per unit
Rs
Marginal
Cost Rs
? C/? U
Total
Cost
Rs
1.
500
500
10
10
10
510
2.
50
500
100
500
10
10
1000
3.
100
500
1000
10
10
1500
4.
150
500
3.333
1500
10
10
2000
Variable Cost
Variable cost per unit
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Marginal Costing
X'- Units
Y'- Cost in Rupees
The following are the various components of variable cost.
l
Direct Labour: Wages paid to the labourers who directly involved in the production
of goods.
The variable overheads is the cost involved in the procurement of Indirect materials
Indirect labour and Indirect Expenses.
Indirect Material- cost of fuel, oil and soon
Indirect Labour- Wages paid to workers for maintenance of the firm.
From the above table -1 the marginal cost is equivalent to the variable cost per unit of the
various levels of production. The fixed cost of Rs.500 is the cost remains the same at not only
irrespective levels of production but also already absorbed at the initial level of production.
The initial absorption of fixed overhead led the marginal cost to become as variable cost.
The costs are classified into two categories viz fixed and variable cost.
Contribution
Method of Difference
Sales- Variable Cost
Method of Meeting
Fixed cost+Profit
xxxx
Variable Cost
xxxx
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Contribution
Fixed Cost
Profit
xxxx
xxxx
xxxx
Sales Rs.100,000/-, variable cost Rs.25,000/- and fixed cost Rs.20,000/- find-out the
contribution and profit.
Rs.
Sales
1,00,000
Variable Cost
50,000
Contribution
50,000
Fixed Cost
20,000
Profit
30,000
Marginal Costing(MC)
Break
Divide
Even
Equal
Point
182
Break Even Point is the point at which the Total Cost is equivalent to Total Revenue. At
the break even point the business neither earns profit nor incurs a loss. It means that the
firm's cost is recovered at the minimum level of production.
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Marginal Costing
Total Cost
No Profit / No Loss
If Sales > BEP Sales earn profit i.e. Total Sales> Total Cost which leads to earn
profit.
If Sales< BEP Sales incur loss i.e. Total Sales< Total Cost which registers incurrence
of loss.
This Break even point analysis can be interpreted into two classifications. The first
classification is narrow sense of BEP, which mainly emphasizes on BE Point.
The second segment is the broader sense which elucidates the role of BEP towards
managerial decisions
l
The enlisted decisions will be discussed immediately after the preliminary aspects of
marginal costing i.e. Break even analysis.
Check Your Progress
1.
2.
3.
4.
Variable costing
(b)
Profit
(c)
Fixed costing
(d)
Volume of sales
BEP means
(a)
(b)
(c)
(d)
(b)
(c)
(d)
(b)
(c)
(d)
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5.
Fixed cost
(b)
(c)
Variable cost
(d)
The Break even point in accordance with narrow sense can be classified into two
categories
l
Rs.20/-
Variable Cost
Rs.10/-
Contribution
Rs 10/-
Fixed Cost
Rs.1000/-
Profit
If the firm produces only one unit, the amount of loss is Rs.990/-. To avoid the amount of
loss how many units are to be produced ?
As already highlighted, BEP is the point at which the firm neither earns profit nor incurs loss.
Profit/Loss is a resultant out of Contribution while meeting out the fixed cost volume of
the transaction. From the above example, the contribution per unit is Rs.10/ not sufficient
to meet out the fixed cost volume of Rs.1000/-. The purpose of finding out the BEP in
units is to identify the level of contribution which is not only equivalent as well as to meet
fixed cost of the transaction but also to avoid loss. To raise the volume of contribution at
par with the fixed cost volume, fixed cost has to be related to the contribution margin per
unit through the ratio given below
Fixed cost= "X" units x Contribution Margin Per Unit
"X" units can be found out from the following
"X" units =
Fixed Cost
Contribution Margin Per Unit
The total number of units "X" which equate the contribution volume of "X" units with the
total fixed cost is the Break Even Point (Units).
Break Even Point (Units) =
184
Fixed Cost
Contribution Margin Per Unit
The above illustration reveals that how many number of times the contribution margin
per unit should be equivalent to the total fixed cost volume. Hence the number of times
is nothing but the units required to have equivalent volume of contribution to the tune of
fixed cost.
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Marginal Costing
11.6 VERIFICATION
At the level of 100 units
Sales
100Rs.20
Rs.2,000/
Variable Cost
100Rs.10
Rs.1,000/
Contribution
100Rs.10
Rs.1,000/
Fixed Cost
Rs.1,000/
Profit/Loss
2.
PV Ratio Method.
Fixed Cost
PV ratio
What is PV ratio?
PV ratio is Profit Volume ratio which establishes the relationship in between the profit
and volume of sales. It is a ratio normally expressed in terms of contribution towards
volume of sales. It is expressed in terms of percentage.
Utility of PV ratio:
l
To find out the Break Even Point in sales volume
l
To identify the desired level of profit at any sales volume
l
To determine the sales volume to earn required level of profit
l
To identify better product mix among the alternatives available etc.
Profit Volume Ratio (PV ratio) =
Sales-Variable Cost
Contribution
=
Sales
Sales
Rs.1000/100 = 50%
Rs. 2000/-
From the above workings, it obviously understood that every unit of sale contributes
50% towards in covering the fixed cost and profit.
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Fixed Cost
PV ratio
In Percentage
Sales
100Rs.20
Rs. 2,000/
100%
Variable Cost
100Rs.10
Rs.1,000/
50%
Contribution
100Rs.10
Rs.1,000/
50%
Fixed Cost
Rs.1,000/
Profit/Loss
At Break even level, the fixed cost volume is equivalent to contribution; the later which
is related in terms of sales i.e. PV ratio will be applicable to the earlier i.e. fixed cost.
At Break even sales, Fixed Cost = Contribution;
Contribution
Sales = Sales
Contribution
Rs.3,00,000
Rs.20/-
Rs.30/-
Fixed Cost
Contribution Margin Per Unit
Rs.3,00,000
= 30,000 units
Rs.10
Contribution
100
Sales
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Rs 10
=
100 = 33.33%
Rs.30
=
Marginal Costing
Fixed Cost
Rs.3,00,000/
=
= 9000 100 = 900,000/PV ratio
33.33%
Illustration 3:
Calculate Break even point
Rs.
Sales
6,00,000/-
Fixed Cost
1,50,000/-
Variable Expenses
Direct Material
2,00,000/-
Direct Labour
1,20,000/-
Overhead Expenses
80,000/-
Fixed Cost
Rs.1,50,000
=
= Rs.4,50,000/PV ratio
1/3
Note: Break even point in units is not possible to find out due to non availability of selling
price and variable cost per unit ; which constrained the computation of contribution
margin per unit.
Illustration 4:
From the following particulars find out the BEP. What will be the selling price per unit if
BEP is brought down to 900 units?
Variable Cost
Rs 75/
Fixed Cost
Rs.27,000/
Fixed Cost
Contribution Margin per unit
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= Rs.100-75 = Rs.25
=
Rs.27,000
= 1080 units
Rs.25
If break even point is reduced to the level of 900 units; what is the new selling price?
First step to find out the contribution margin per unit; contribution margin per unit will be
computed from the BEP (units) formula.
BEP (Units) = 900 =
Rs.27,000
Contribution Margin per unit
Units
Fixed Cost
Rs
Variable Cost
Rs
Sales
Rs
Total Cost
Rs
500
10
20
510
2)
50
500
500
1000
1000
3)
100
500
1000
2000
1500
4)
150
500
1500
3000
2000
Cost/ Volume
Rs
3000
TS
2000
1500
TC
BEP
1000
Margin
of Sa fety
FC
500
10
50
Units
100
150
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Margin of safety is the excess volume of sales over the break even sales. It is highlighted in the
form absolute sales or in percentage. It is the difference in between the actual sales and break
even sales. It elucidates the extent in which sales can be reduced without incurring a loss.
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Marginal Costing
(Or)
=
Profit
PV ratio
The greater the margin of safety leads to soundness of the firm's business.
Fixed Cost
PV ratio
The above formula is in accordance with the method of coverage i-e covering the fixed
cost and profit.
Contribution = Fixed Cost + Profit
To earn desired level of profit, which the firm intends to earn should have to be combined
with the fixed cost, are the two different components to be covered only in order to find
out the contribution level to the tune of unchanged selling price and variable cost per unit.
New volume of Sales (Rupees) =
Illustration 5:
From the following information relating to quick standards ltd., you are required to find
out i) PV ratio ii) break even point iii) margin of safety iv) calculate the volume of sales
to earn profit of Rs.6,000/
Total Fixed Costs Rs.4,500/
Total Variable Cost Rs.7,500/
Total Sales Rs.15,000/First step to find out the Contribution volume
Sales
Rs 15,000/
Variable Cost
Rs. 7,500/
Contribution
Rs.7,500/
Fixed Cost
Rs.4,500/-
Profit
Rs.3,000
(i)
7,500
Contribution
100 =
100 = 50%
15,000
Sales
Fixed cost
4,500
=
= 9,000/PV ratio
50%
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Margin of Safety =
Profit
Rs.3,000
=
= Rs.6,000/PVratio
50%
Rs.4,500 + Rs.6,000
= Rs.21,000/50%
Illustration 6:
Break even sales
Rs.1,60,000
Rs.2,00,000
Rs.12,000
Calculate
(a)
(b)
During 1988, it is expected that selling price will be reduced by 10%. What should
be the sale if the company desires to earn the same amount of profit as in 1987 ?
PV ratio =
Profit
PV ratio
Rs.12,000
Profit
=
= 30%
Rs.40,000
Margin of safety
What is PV ratio ?
PV ratio =
30% =
190
Contribution
100
Sales
Contribution
Rs.2,00,000
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Marginal Costing
Now with the help of the available information, the fixed expenses to be found out from
the illustrated formula
Fixed expenses = Contribution- Profit = Rs.60,000 Rs,12,000 = Rs.48,000
The next one is to find out the corresponding variable cost. The variable cost could be
found out with the help of the following formula
Sales- Variable cost = Contribution
Rs.2,00,000- Rs.60,000= Variable cost= Rs.1,40,000
(a)
(b)
Rs.1,80,000
Variable cost
Rs.1,40,000
Contribution
Rs.40,000
For the new level of sale volume in rupees, the new PV ratio has to be found out
PV ratio =
Rs.40,000
Contribution
100 =
100 = 2/9 times
Rs.1,80,000
Sales
The next important step is to determine the volume of the sales to earn the desired
level of profit
=
Rs.48,000 + Rs.12,000
= Rs.2,70,000
2/9
Illustration 7:
SV ltd a multi product company, furnishes you the following data relating to the year
1979
Particulars
Sales
Rs.45,000
Rs.50,000
Total cost
Rs40,000
Rs.43,000
Assuming that there is no change in prices and variable costs that the fixed expenses are
incurred equally in the two half year periods calculate for the year 1979
Calculate
(a)
PV ratio
(b)
Fixed expenses
(c)
(d)
Margin of safety
(C.A. Inter May, 1980)
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(a)
Change in Profit
100
Change in Sales
To identify the change in profit, the profits of the two different periods should be
known
Profit= Sales-Total cost
Profit of the first half of the year = Rs.45,000Rs.40,000 = Rs.5,000
Profit of the second half of the year= Rs.50,000Rs.43,000 = Rs.7,000
Change in profit= Rs.7,000Rs.5,000= Rs.2,000
Change in sales= Rs.50,000Rs.45,000=Rs.5,000
PV ratio =
(b)
Rs.2,000
100 = 40%
Rs.5,000
Fixed expenses, to find out the contribution should be initially found out
Contribution = Sales PV ratio
= Rs.50,000 40% = Rs.20,000
The fixed expenses to be found out through the following equation
Contribution-Fixed expenses= Profit
Rs.20,000Rs.7,000= Rs.13,000= Fixed expenses
The fixed expenses found only for six months ; for the entire year
= Rs.13,000 2=Rs. 26,000
(c)
BE Sales
=
(d)
Fixed expenses
Rs. 26,000
=
= Rs.65,000
PV ratio
40%
Margin of safety
= Total sales- BE sales
The next component to be found out is total sales
Total sales = Sale of the first half of the year + Sale of the second half of the year
= Rs.45,000 + Rs.50,000 = Rs.95,000
Margin of safety= Rs.95,000 Rs.65,000= Rs.30,000
Margin of safety in percentage of sales =
Rs. 30,000
100= 31.578%
Rs. 95,000
The leading four wheeler manufacture in India is buying the panel from the NTTF on
contract basis instead of manufacturing.
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Why don't they manufacture in spite of buying them from the NTTF ?
Marginal Costing
Rs 7,00
Direct Labour
Rs. 8.00
Rs. 2.00
Fixed expenses
Rs. 3.00
Total
Rs.20.00
The first point to be found out that the contribution of the transaction. The cost of
manufacturing should be compared with the price of the product which is available in the
market.
To find out the worth of the transactions, first the cost of manufacturing should be found
out
Material
Rs. 7.00
Direct Labour
Rs. 8.00
Rs. 2.00
Total
Rs.17.00
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Illustration 9
A refrigerator manufacturer purchases a certain component @ Rs.50 per unit. If he
manufactures the same product he has to incur a fixed cost of Rs.20,000 and variable
cost per unit is Rs. 40/- when can the manufacturer make on his own or when he can
buy from outside ?
When the requirements is Rs. 5,000 units, will you advise to make or buy?
The very first point to be found that Break even point in units.
The break even point in units at which the cost of buying is equivalent to the cost of
manufacturing.
The cost of purchase per unit - Rs 50/If the same product is manufactured, what would be the total cost of manufacture ?
Total cost of manufacture= Total fixed cost + Variable cost
The cost of buying is felt that an exorbitant one than the cost of manufacturing. Having
observed, as a manufacturer undergoes for the manufacturer of a component. If he
manufactures a component, he could save Rs.10=( Rs.50Rs.40) Which in other words
known as contribution per unit
Before finding out the Break even point in units, the contribution of the product should be
found out.
Contribution margin per unit= Selling price in the market Cost of manufacture
Contribution margin per unit is nothing but the amount of savings to the manufacture.
Amount of savings out of the manufacture = Purchase price Variable cost
Though the firm enjoys savings, it is required to additionally incur fixed cost of operations
Rs.20,000
Break even point in units =
Fixed cost
Purchase price- Variable cost
Rs.20,000
= 2,000 units
Rs.50Rs.40
At 2,000 units, the firm considers both alternatives are incurring equivalent volume of
Cost in manufacturing.
Cost of buying for 2,000 units
=2,000 units Rs.50 per unit= Rs. 1,00,000
Cost of Buying
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No of Units
Manufacturing cost
Buying cost
Decision
@ 2,001 units
Rs.20,000+ Rs.80,0040
=Rs.1,00,040
2001 Rs.50
= Rs.1,00,050
Manufacturing
cost < Buying cost
Advisable to
manufacture
@1,999 units
Rs.20,000+Rs.79,960
=Rs.99,960
1,999 Rs.50
Rs.99,950
Manufacturing
cost > Buying cost
Advisable to Buy
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The next step is to identify the worth of either manufacturing the units or buying the units
at 5,000
Marginal Costing
Rs.10.00
Direct wages
Rs.6.00
Factory overhead
Fixed
Rs1.00
Variable
Rs.1.00
Administrative expenses
Rs.2.00
Rs.1.50
Rs.0.50
Variable
Rs.1.00
Rs.1.50
Rs.21.00
The above figures are for an output of 50,000 units. The capacity for the firm is 65,000
units A foreign customer is desirous of buying 15,000 units a price of Rs.20 per unit.
Advise the manufacturer whether the order should be accepted, what will be your
advise if the order were from the local merchant?
The acceptance of the order is mainly based on the two important covenants viz Additional
cost and Additional revenue.
If the additional demand of the foreign buyer is able to generate the additional revenue
more than the additional cost of the operations, the firm should have to accept the foreign
order.
Decision criteria
Marginal/Additional cost for the additional order of 15,000 units
Selling price
Less:Marginal cost
15,000 units
20
3,00,000
18
2,70,000
30,000
Rs
Direct material
10.00
Direct wages
6.00
Variable overhead
Factory
1.00
1.00
The acceptance of the order will generate marginal profit of Rs.30,000 which should be
accepted. The fixed portion of the factory and selling overheads were already met out
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which should not be included again in the computation of the marginal or additional cost
of the foreign order placed by the business enterprise.
Instead, If the firm accepts the local order at the rate of Rs.20 which automatically will
spoil the relationship with the very good customers who regularly purchase at the rate of
Rs.24. This will lead to cannibalization of the existing pricing strategy.
Direct Material
24
14
Selling price
100
110
2 Hours
3 Hours
(I.C.W.A.Inter)
The product is being chosen by the manufacturer based on the ability of generating
higher contribution. The higher the contribution leads to a better the position for the firm
The worth of the product is being selected on the basis of
Particulars
Selling price
100
110
24
14
Contribution
30
70
23
87
2 Hours
3 Hours
Rs.87/3 Hrs= Rs 29
From the above calculation, it is obviously understood that the firm is having higher
contribution margin per hour in the case of product A over the other one, portrays the
product A is better than B.
Illustration 12
The following particulars are obtained from costing records of a factory:
196
Particulars
80
320
100
200
Contd...
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Variable overhead
40
80
Selling price
400
1,000
Rs.30,000
Marginal Costing
(b)
(c)
(d)
Selling price
Direct Material Rs.20 per Kg
400
80
100
Variable overhead
40
220
180
80
600
400
Now the contribution per unit has found out with the help of above given information the
next step is to study the contribution margin per unit to the tune of given constraints of
the firm.
(a)
The first constraint is in adequate supply of the raw material: The raw materials
are considered to be precious due to insufficient supply to the requirement of the
firm. Having considered the scarcity of the raw material, the constraint in availing
the raw material is denominated in terms of ability of contribution generation.
Particulars
Contribution margin per unit
Consumption of raw material
per unit
Cost of raw material per unit
Cost of material per Kg
Contribution per Kg
Rs 80 = 4 Kgs
Rs.20
Rs.320 = 16 Kgs
Rs20
Rs.400 = Rs.25
16 Kgs
It obviously understood that the firm enjoys greater contribution margin per k.g in
the case of Product A during the scarcity of raw material than the product B.
(b)
Then the production capacity of the firm is subject to the availability of the labour and
the hours normally consumed by them for the production of a single product. Due to
shortage of the labour, the firm should identify the product which requires lesser
labour hours as well as able to generate more contribution margin per labour hour.
In the next step, Contribution margin per hour should be calculated.
Particulars
Contribution margin per unit
Consumption of Labor Hrs
Cost of Labor per unit
Cost of Labor per Hour
Contribution per Hr of the
product
Rs100 = 10 Hrs
Rs.10
Rs.200 = 20 Hrs
Rs10
Rs.400 = Rs. 20
20 Hrs
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The contribution per hour is greater in the case of the product B, considered to be
as a better product among the given. It means that the firm has better opportunity
to earn greater contribution in the case of product B than A.
(c)
The next one is that sale of the quantities is the major limiting factor. It means that
the vendor finds some what difficulties in selling the articles. While considering the
difficulties in selling the quantities, the firm should identify the product which is able
to generate greater contribution.
From the earlier calculation, it is clearly understood that, the product B is bearing
greater value of contribution margin per unit than the product.
(d)
If the sales value is considered to be a limiting factor, to choose one among the
given products PV ratio is being applied as a measure. It means that the sales
value of the products are ignored for comparison in between them. To identify the
better product, irrespective of the price, PV ratio should be applied. The PV ratio
of the Product A & B are calculated as follows
Profit volume ratio =
Contribution
100
Sales
For A = 45%
For B = 40%
The PV ratio is greater in the case of product A than B. The product A has to be
chosen
Check Your Progress
1.
2.
Which is the following factor equated to the Contribution at the level of Break Even
Point ?
(a)
Fixed cost
(b)
Sales
(c)
Variable cost
(d)
Semi-Variable cost
What is the change to be made on the BEP formula to find out the volume of sales at
the desired level of profit ?
(a)
Desired profit
(b)
Fixed cost
(c)
(d)
198
If the supply of the material is considered to be scared in the market for two different
units of production of ABC ltd. How the worth of the units of production could be
studied through Key factor analysis?
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2.
3.
(a)
(b)
(c)
(d)
Marginal Costing
While accepting export order, which component of influence should not be taken into
consideration?
(a)
Direct material
(b)
Direct expenses
(c)
Direct labour
(d)
Fixed cost
If Licon co ltd wants to induct a product B along with the existing product line, what
would be the deciding factor to undertake or reject?
(a)
Composite contribution
(b)
Fixed cost
(c)
(d)
Illustration 13
From the following information has been extracted of EXCEL rubber products ltd
Direct materials A
Rs 16
Direct materials B
Rs12
Direct wages A
Direct wages B
Variable overheads
150% of wages
Fixed overheads
Rs. 1,500
Selling price A
Rs.50
Selling price B
Rs.40
The directors want to be acquainted with the desirability of adopting any one of the
following alternative sales mixes in the budget for the next period.
(a)
(b)
(c)
(d)
State which of the alternative sales mixes you would recommend to the management?
The first step is to determine the contribution margin per unit of A and B.
The determination of the contribution of product A and B are through the preparation of
Marginal costing statement.
Particulars
Product A
Selling price
Rs
Product B Rs
50
40
16
12
Direct wages
12
Variable overheads
18
12
Variable cost
46
32
Contribution
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(b)
Product of A
Rs.1,000
Product of B
Rs.2,000
Contribution
Rs.3,000
Fixed overheads
Rs.1,500
(d)
Rs.1,500
Rs.3,200
(c)
Profit
Fixed overheads
Rs.1,500
Profit
Rs.1,700
Rs.1,600
Product of B
Rs. 800
Contribution
Rs.2,400
Fixed overheads
Rs.1,500
Profit
Rs.900
Rs.600
Product B
Rs.2,800
Contribution
Rs.3,400
Fixed overheads
Rs.1,500
Profit
Rs.1,900
Mix
Contribution
Rs.1,500
1,700
900
1,900
The profit level among the given various mixes, the mix (d) is able to generate
highest volume of profit over the others
If it is decided to work the factory at 50% capacity, the selling price falls by 3%. At 90 %
capacity the selling price falls by 5% accompanied by a similar fall in the prices of material.
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You are required to calculate the profit at 50% and 90% capacities and also calculate
break even point for the same capacity productions.
(C.A.Inter May,1976)
Marginal Costing
The very first step is to compute number of units at every level of capacity i.e. 50% and
90%.
But in this problem, 40 % capacity utilization given which amounted 10,000 units.
For 50% =
10,000
units 50 = 12,500 units
40
For 90 % =
10,000 units
90 = 22,500 units
40
The important information is that the changes taken place in the selling price of the
product.
Selling price = Rs.20 @ 40% i.e., 10,000 units
Selling price @ 50% i.e. 12,500 units = Rs.203% on Rs.20 = Rs.19.40
Selling price @90% i.e. 22,500 units=Rs.205% on Rs.20 = Rs.19
While preparing the marginal costing statement, the fixed cost portion should not be
included for the computation of the contribution.
The next step is to prepare the marginal costing statement.
Particulars
Selling price
Less: Direct Materials
50 % capacity(12,500 Units)
Per unit Rs
Total Rs
Per unitRs
19.40
2,42,500
19.00
4,27,500
10
1,25,000
9.50
2,13,750
TotalRs
Direct wages
37,500
67,500
Variable overheads
25,000
45,000
Variable cost
15
Contribution
4.40
14.50
55,000
4.50
1,01,250
Fixed costs
30,000
30,000
Profit
25,000
71,250
Rs.30,000
Rs.4.40
=6,818 units
Rs.30,000
Rs.4.50
=.6,667units
6,667units Rs.19
=Rs.1,26,673
201
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11.17 KEYWORDS
Marginal cost: Change occurred in the cost of operations due to change in the level of
production.
B E P (Units): It is the level of units at which the firm neither incurs a loss nor earns
profit.
BEP (Volume): It is the level of sales in Rupees at which the firm neither incurs a loss
nor earns profit.
Fixed cost: It is a cost which is fixed or remains the same for irrespective level of
production.
Variable cost: It varies along with the level of production.
Contribution: It is an amount of balance available after the deduction of variable cost
from the sales.
Key factor: Factor of influence on the component of contribution.
PV ratio: Profit volume ration which is nothing but the ratio in between the contribution
and sales.
Desired profit: It is a profit level desired by the firm to earn at the given level of sales
volume.
202
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2.
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3.
4.
5.
6.
7.
8.
9.
Marginal Costing
203