Accounts Notes: WHAT IS MARGINAL COSTING

Saturday 19 March 2011

WHAT IS MARGINAL COSTING

Statement of profit:-

Particulars Amount
Sales ***
Less:-Variable cost ***
Contribution ***
Less:- Fixed cost ***
Profit ***

1) Sales = Total cost + Profit = Variable cost + Fixed cost + Profit

2) Total Cost = Variable cost + Fixed cost

3) Variable cost = It changes directly in proportion with volume

4) Variable cost Ratio = {Variable cost / Sales} * 100

5) Sales – Variable cost = Fixed cost + Profit

6) Contribution = Sales * P/V Ratio

7) Profit Volume Ratio [P/V Ratio]:-
• {Contribution / Sales} * 100
• {Contribution per unit / Sales per unit} * 100
• {Change in profit / Change in sales} * 100
• {Change in contribution / Change in sales} * 100

8) Break Even Point [BEP]:-
• Fixed cost / Contribution per unit [in units]
• Fixed cost / P/V Ratio [in value] (or) Fixed Cost * Sales value per unit
(Sales – Variable cost per unit)
9) Margin of safety [MOP]
• Actual sales – Break even sales
• Net profit / P/V Ratio
• Profit / Contribution per unit [In units]

10) Sales unit at Desired profit = {Fixed cost + Desired profit} / Cont. per unit

11) Sales value for Desired Profit = {Fixed cost + Desired profit} / P/V Ratio

12) At BEP Contribution = Fixed cost
13) Variable cost Ratio = Change in total cost * 100
Change in total sales

14) Indifference Point = Point at which two Product sales result in same amount of
profit
= Change in fixed cost (in units)
Change in variable cost per unit

= Change in fixed cost (in units)
Change in contribution per unit

= Change in Fixed cost (in Rs.)
Change in P/Ratio

= Change in Fixed cost (in Rs.)
Change in Variable cost ratio

15) Shut down point = Point at which each of division or product can be closed

= Maximum (or) Specific (or) Available fixed cost
P/V Ratio (or) Contribution per unit
If sales are less than shut down point then that product is to shut down.

Note :-

1) When comparison of profitability of two products if P/V Ratio of one product is
greater than P/V Ratio of other Product then it is more profitable.

2) In case of Indifference point if
Sales > Indifference point --- Select option with higher fixed cost (or) select option with lower fixed cost.