## Saturday, May 31, 2008

### Marginal Costing

Q:- 2 Define marginal cost and marginal costing ? How are veriable cost and fixed cost treated in marginal costing ?
Ans.
Define Marginal Cost :-
Marginal cost is change in total cost due to increase or decrease one unit or output.
Marginal costing
Marginal costing is technique to show the effect on net profit if we classified total cost in verible cost and fixed cost .
Explaination or steps in marginal costing
Ist step
Calculation of marginal cost
Second step
Cost volume profit or break even point
Marginal cost equation
Here is veriable cost is marginal cost .
Sale = verible cost +fixed expenses +or_ profit/loss

S=V+F+_P/L

S-V=F+_P/L

Or

Sale –Verible cost =Contribution

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Break even point analysis
Or cost volume profit analysis
Break even point is a point where total cost is equal to total sale price . In cost volume profit analysis , we establish relation of cost , volume of output and profit , we can show it with break even point chart
Mathematical formula use in study of cost volume profit analysis
1. Contribution
2. Contribution /Sale or C/S or P/V Ratio
3. Break –even point
4. Margin of safety

1. Contribution
Contribution is difference between sale and marginal cost
Contribution= Selling Price –Marginal cost/verible cost

Or
Contribution = Fixed expenses+profit
Or
Contribution – fixed expenses = Profit
2. Profit valume
Or p/v ratio= Contribution / sale =C/S
Or
p/v Ratio= fixed expenses +profit / sale =F+P/ S

or

P/V ratio = Sale – verible cost /sale = S- V/ S
3. a) Break even point ( in rs. ) = Fixed cost / P/V ratio
= F/P/V ratio
b) verible cost = sale ( 1- p/v ratio)
c) profit = ( sale X p/v ratio) – Fixed cost
d) fixed cost =( sale Xp/v ratio) – profit
e) marginal of safety = profit /p/v ratio
f) break even point ( in unit )
= total fixed expenses/ selling price unit - marginal cost per unit
g) for break even point equation

sale = cost

sale = fixed cost + verible cost
sale – verible cost = fixed cost or
s – v = F
or
1X (S-V) = F
1= F/S-V

Break even point in break even chart 