Marginal Costing

Marginal Costing is an accounting system where only variable cost or direct cost will be charged to the cost units. This costing technique is also known as direct costing .Fixed costs are never charged to production. They are written off to the profit and loss account. Marginal Costing focuses on the relationship between cost, price and volume. This method concentrates on the controllable aspects of business by separating fixed and variable costs. Marginal Costing helps in Pricing decisions, showing the true profit of the period, preparing break-even analysis and also Business Decision making. (Like Fixation of selling price, Key or limiting factor,  Make or buy decisions,  Selection of a suitable product mix,  Effect of change in price, Closing down or suspending activities,  Maintaining a desired level of profit)

Marginal cost is the cost management technique for the analysis of cost and revenue information and for the guidance of management.

Absorption costing and marginal costing are two different techniques of cost accounting. Absorption costing is widely used for cost control purpose whereas marginal costing is used for managerial decision-making and control.

Let us discuss few formulae related under Marginal Costing:

Profit = Sales – Total Cost. (Variable + Fixed Cost).

Fixed Cost + Profit = Sales – Variable Cost. (F+P= S-V)

 Contribution = Sales –Variable Cost (C= S- V)

Contribution P.U. =   Selling Price Per Unit – Variable Cost Per Unit

Total contribution = Contribution P.U. X No. of Units.

P/v Ratio or Profit /Volume Ratio= Contribution; (C/S)

                                                      Sales

                                             = Sales-Variable Costs

                                                       Sales

                                             = 1- Variable Cost

                                                       Sales

                                             = Change in Profit(Contribution)

                                                    Change in Sales

Let us discuss the Break Even Point and Break Even Analysis. Break even point is the level of sales value   at which the profit is zero, that’s a point of No Profit- No Loss. The relationship between cost, production, volume and returns is explained by Break Even Analysis. Its main contribution lies in the fact that it indicates the lowest amount of business activity necessary to prevent losses. The breakeven analysis formula actually is given by many other formulas.

BEP= Fixed Cost           BEP (in units) = Fixed Cost

          P/V Ratio                                  Contribution P.U

                                                        =Fixed costs 

                                    Selling Price P.U. – Variable Cost P.U;

BEP (Sales in Volume) = BEP in Units X Selling Price P.U

                                      = Fixed Cost X Total Sales

                                       Total Sales – Total Variable Cost.

Units for Desired Profit = Fixed Cost + Desired Profit

                                        Contribution P.U.

Sales for Desired Profit = Fixed Cost / Desired Profit 

                                                  P/v Ratio     

Margin Of Safety

Margin of safety is the excess of actual sales over the break even volume of sales. It states the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even.

Margin of Safety (MOS) = Total Sales – BEP Sales

Let’s note few readings:

•A low break even point implies that the organization can survive even if it is operating at lower level of activity. It That shows that  the lower the break even point, the better it is.
•The greater the margin of safety, the more comfortable the organization will be.

Marginal Costing has few limitations too. The fixed costs are ignored though they are an important part of the total cost of the production. It uses historical data for decisions which relates to the future. It is best suited to the analysis of one product at a time.

Below are some of the areas in which we provide Marginal Costing Help:

• Meaning and features of Marginal Costing
• Marginal costing equation and Cost statement
• Various uses of Marginal Costing and its Limitations
• Make or Buy Decision
• Absorption costing Vs Marginal Costing
• Pricing under various special circumstances
• Product/Sales Mix
• Various types of Costs and Costing
• Planning the volume of Production
• Break Even Point and Break-Even Chart
• Margin of Safety
• Profit-Volume Ratio (P/V Ratio)
• Profit-Volume Chart and its uses
• Angle of Incidence

Our tutors will help clear all your doubts in understanding Break Even Chart, in Assignment and Homework Help. The break even chart is a graphic representation of cost and revenue data which brings out their inter relationship, at different levels of activity