Marginal Costing Flashcards
(12 cards)
Marginal Costing
Marginal Costing is a costing technique where only variable costs are charged to products, and fixed costs are treated as period costs. It is used to analyze the impact of cost and volume changes on profit.
Marginal Cost
Marginal cost refers to the additional cost incurred in producing one extra unit of output. It includes only variable costs such as materials, labor, and variable overheads, and excludes fixed costs.
Fixed Cost
Fixed costs are costs that remain constant regardless of the level of output within a relevant range. These costs do not change in the short run and include expenses such as rent, salaries, insurance, and depreciation.
Variable Cost
Variable costs are expenses that change directly and proportionally with the level of production. Examples include direct materials, direct labor, and variable overheads.
Contribution
Contribution refers to the amount available after subtracting variable costs from sales revenue. It contributes towards covering fixed costs and generating profit.
Formula: Contribution = Sales – Variable Cost
Contribution per Unit
Contribution per unit is the difference between the selling price per unit and the variable cost per unit. It represents the margin earned on each unit sold before fixed costs are considered.
Profit volume ratio
The P/V Ratio is the ratio of contribution to sales, expressed as a percentage. It shows how much contribution is generated from each rupee of sales and is a key indicator of profitability.
Formula: P/V Ratio = (Contribution ÷ Sales) × 100
Break-Even Point (BEP)
> The break-even point is the level of sales at which total revenue equals total cost, resulting in zero profit or loss. It is the point where the business covers all its costs.
Formula (₹): BEP = Fixed Costs ÷ P/V Ratio
Formula (Units): BEP = Fixed Costs ÷ Contribution per Unit
Margin of Safety (MOS)
Margin of safety is the excess of actual or projected sales over the break-even sales. It represents the extent to which sales can drop before the company reaches the break-even point.
Formula: Margin of Safety = Actual Sales – Break-even Sales
Desired Profit Sales
The sales level required to earn a specified target profit is called the desired profit sales. It ensures that contribution covers both fixed costs and the desired profit.
Formula: Sales = (Fixed Costs + Desired Profit) ÷ P/V Ratio
Cost-Volume-Profit (CVP) Analysis
CVP analysis is a technique used to determine how changes in costs and volume affect a company’s operating profit. It helps in understanding the interaction between price, cost, volume, and profit.
Shut-Down Point
The shut-down point is the level of operations below which it is not viable for the company to continue production, as it is unable to even cover its variable costs. Below this point, operations should be temporarily or permanently stopped.
