Cost Management Class Discussion

Issues for discussion

 Marginal cost
 Marginal costing equation
 Contribution
 Contribution to sales ratio (CSR): Contribution Margin

Marginal Costing
 Cost of producing an additional unit of output
 In short run, MC is the sum of the variable expenses
 MC = TC(n) - TC (n-1)
MC = FC + VC(n) -{FC+VC(n-1)}
MC = VC(n) -VC(n-1)
 VC = Direct Material + Direct Labour + Direct Expenses + Variable Overheads

Profit under Marginal Costing

 Deduct VC (V) from Sales (S) Profit under TC and MC
 Excess of S over V is called Contribution ( C ). S-V = C Production = 10000 units
 Deduct Fixed cost from C to get profit Direct Material = 5 per unit
 P=C-F Direct Labour: 10 per unit
C=F+P Direct Expenses = 5 per unit
 Marginal Costing Equation: S-V = F+P Overheads = 150,000
 It is important to note that the closing stock is valued at MC
Fixed: 60%
 If C = F, there is no profit or loss i.e. it is BEP
 If C > F , there is profit Variable: 40%
 If C < F, there is loss Sales = 8000 units 80 per unit
Find profit

Contribution to Sales Ratio (CSR): Contribution Margin

 CSR = C/S *100
Or CSR = S-V/S * 100
Or CSR = F+P/S *100
 Change in profit/Change in sales
 S = 10, V = 4 so CSR = 40%

Breakeven Point (BEP) and Sales (BES)

 BEP is the point where there is no profit or loss
Or Contribution = Fixed Cost ( C = F)
 BEP = F/C, Where C is Contribution per unit
Or BEP = F/S-V
 BES = BEP *S
 BES = F/CSR
 Suppose F = 40,000, S=10, V = 7.5
 C = 2.5 and CSR = 25%
 BES = F/CSR
 BES = 40000/25% = 1,60,000
Cost Management Class Discussion

Margin of safety
 Excess of sales over BES
 Contribution from MOS = Profit
 MOS = AS –MOS
 MOS = Profit/ CSR

Profit under marginal and absorption costing

 Profit will be same incase of no inventory
 Inventory valued at product cost
 Period cost is fully charged against the contribution
 Profit will depend on the value of opening and closing stock