Upload
bharti-goyal
View
40
Download
0
Embed Size (px)
Citation preview
UNIT V
MARGINAL COSTING and BREAK-EVEN
ANALYSIS
Production cost
Fixed cost
Variable cost
TYPES OF COST
• Does not vary with the volume of output over a short period of time
Fixed cost
• Changes directly with the volume of output
Variable cost
• Partly fixed and partly variableSemi-
variable or Semi-fixed
cost
Remain fixed over long period of time
Does not change with volume of production
Treated as period cost High FC, higher break even Insurance, interest
expense, property taxes, utilities expenses and depreciation of assets.
FIXED COST
Fixed cost= Rs.50000 5000 units
Rs.10 per phone
Fixed cost= Rs.50000 10000 units
Rs.5 per phone
Changes with the volume of output
Cost of raw material, labor, packaging charges etc
Reveals the performance of business
More production, high VC
VARIABLE COST
Produces 60 pizza Cost of raw material= Rs. 6000
Produces 40 pizza Cost of raw material= Rs. 4000
Marginal costing is defined as, ”the amount of any given volume of output by which
aggregate costs are changed if the volume of output is
increased by one unit”
MARGINAL COST
Manufactures computer
ABC ltd. Manufactures 100 units of computer at Rs. 5,000 each. The total cost of manufacturing 100 units is Rs.
500,000
They decided to produce 1 extra
unit. Then the cost of producing 101
units would be Rs. 505,000. Thus ,
the Marginal cost is Rs. 5,000 i.e., 505000-500000
The Institute of Cost and Management Accountants, London, defines marginal costing as: “the ascertainment of marginal costs and of the effect on
profit of changes in volume or type of output by differentiating between fixed and variable cost”
Concerned with changes in cost and profit resulting from changes in volume of outputA.k.a. “variable costing”Marginal costing= Change in cost
Change in quantityBreak-even analysis
MARGINAL COSTING
CHARACTERISTICS OF MARGINAL COSTING
Decision making
Inventory valuation
Linkage of cost and activity
Pricing Fixed and Variable
Cost
Marginal Costing and
profit
Technique of analysis and presentation of costs which helps management in taking many managerial decisionsElements of cost production (administration, distribution, selling) are classified as fixed and variable componentsVariable cost as the cost of the productFixed cost period costFinished goods and work-in-progress are valued at marginal costPrices are determined on the basis of marginal cost
ASSUMPTIONS OF MARGINAL COSTING
Techniques of marginal costing are based on the following assumptions :
Elements of cost-
Variable cost fluctuates directly in proportion to change in the volume of outputSelling price per unit may remain unchanged or constantFixed costs does not change for entire volume of outputVolume of production is the only factor which influences the costs
FIXED COST
VARIABLE COST