Amity School of Business BBA, II SEMESTER MODULE IV Amity Business School Amity School of Business BBA, II SEMESTER MODULE IV

MARGINAL COSTING Also known as variable costing or direct costing Under this technique, only variable costs are charged as product cost and included in inventory. Fixed manufacturing costs are not allotted to products but are considered as period costs and thus charged directly to Profit and loss Account of the year.

Marginal Cost Its same as variable cost Marginal cost is the additional cost of producing an additional unit of product. CIMA defined marginal cost as the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit.

Variable costing is defined by CIMA as The accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution. Its special value is in decision making.

Characteristics of Variable Costing Segregation of costs into fixed and variable elements Only variable costs are charged to products produced during the period. Fixed costs are treated as period costs and are charged to Costing Profit and Loss Account.

The work in progress and finished stocks are valued at variable costs only. Contribution: Contribution is the difference between sales value and variable cost of sales. The relative profitability of products or departments is based on a study of ‘contribution’ made by each of the products or departments.

In marginal costing, profit is calculated by two stage approach. First of all, contribution is determined for each product or department. The contributions of various products or departments are pooled together. Then from this pooled contribution, total fixed cost is deducted to arrive at profit or loss.

Advantages Help in managerial decisions Cost control Simple technique No under or over absorption of overheads Constant costs per unit Realistic valuation of stocks Aid to profit planning

COST VOLUME PROFIT ANALYSIS Cost of production Volume of sales Profit These are inter related The cost of a product determines its selling price and selling price determines the level of profit.

According to CIMA, CVP analysis is the study of the effects on future profits of changes in fixed cost, variable cost, sales price, quantity and mix.

Break Even Analysis Break even analysis is widely used technique to study CVP relationship. BEP analysis is concerned with determining break even point i.e., that level of production and sales where there is no profit and no loss. It is used to determine probable profit/loss at any level of production/sales or volume of sales to earn a desired amount of profit.

Assumptions underlying Break Even Analysis All costs can be separated into fixed and variable components. Variable cost per unit remains constant and total variable cost is directly proportional to volume of production Total fixed cost remains constant. Selling price per unit does not change with volume of sales.

There is only one product or in case of multiple product, sales mix remains unchanged Volume of production equals volume of sales. Productivity per worker does not change There will be no change in general price level.

Contribution = Sales – Variable cost Contribution = Profit + Fixed Cost P/V Ratio = Contribution Sales BEP = Fixed Cost P/V Ratio