Created on 17/09/2007 12:45:00

MBA I

MARGINAL COSTING

1. DEFINITIONS

 Marginal Costing

 Marginal Cost

 Direct Costing

 Differential Cost

 Incremental Cost

 Contribution

 Key factor

2. ASCERTAINMENT OF MARGINAL COST

Variable Expense

Fixed Expenses

Semi-Variable Expenses

3. ADVANTAGES & LIMITATIONS OF MARGINAL COSTING

 Advantages

 Limitations

4. MARGINAL COST EQUATION

S= Selling Price per unit

U= Number of units
V= Variable Cost per unit
F= Fixed Cost
P= Profit

Sales = SxU
Total Variable Cost = VxU

Profit = (SxU)-(VxU)-F
P = U(S-V)- F

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5. PROFIT VOLUME RATIO %

S-V OR C x 100 OR F+P

S S S

PV Ratio is also = Change in Profit/Change in sales

6. Improvement of P/V Ratio

7. Use of P/V Ratio:

BEP

S-V=F+P
C=F+0
C=F
S=F

BREAK EVEN SALES

FC/PV RATIO

FC FCXS
C S-VC
S

SALES REQUIRED TO EARN A DESIRED AMOUNT OF PROFIT

FIXED COST + DESIRED PROFIT

PV RATIO

8. BREAK EVEN CHART

9. LIMITATIONS OF BREAK EVEN CHART

10. USES OF BREAK EVEN CHART

11. LIMITATIONS OF BREAK EVEN CHART

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12. MARGIN OF SAFETY

MOS =ACTUAL SALES – BE SALES

MOS = PROFIT
P/V RATIO

13. DECISION MAKING USING MARGINAL COSTING

i. Pricing decision under special circumstances

ii. Make or buy decision
iii. Shut down or continue decision
iv. Export vs Local sale decision
v. Expand or contract decision
vi. Product Mix decision
vii. Price Mix decision

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