Thursday, January 26, 2012

Marginal Costing Formulas

Marginal Costing Formulas
Marginal Costing Equation: We know that profit is difference between sales & total cost. Total can bifurcated in to Fixed & Variable costs. Thus,
Profit = Sales – Total Cost Where Total cost= Variable Cost + Fixed Cost
The above formula can also be written as:
Profit = Sales – Variable Cost - Fixed Cost Or
Fixed Cost + Profit = Sales – Variable Cost.
Profit per unit = Selling Price – Variable Cost per unit - Fixed Cost per unit

Fixed Cost: F.C, as the name suggests, remain fixed in amount. The amount spent towards such an expensive remains the same irrespective of the Volume of production. They may have to be incurred even if there is no production. For ex: rent of factory building, Salaries, Audit fees, go down rent etc.
Fixed cost = Sales – Variable Cost – Profit (Loss); or
Fixed cost = (Sales*PV Ratio) – Profit (Loss).

Variable Cost: Variable cost varies in direct proportion to the volume of production. No variable costs are included if production is stopped. As production increases, variable costs increase. However, Variable cost P.U will not change. For Ex: if it is estimated that 2 units are required to produce 1 unit of finished product, then material cost will continue to increase as the number of units finished stock desired increases. All direct costs are Variable cost. Commission to sales persons, certain taxes, etc.
Variable cost = Sales – Fixed Cost – Profit (Loss); or
Variable Cost = Sales*Variable cost ratio where Variable cost ratio = 1 – PV Ratio.

Semi -Variable Cost: S.V.C change with the changes in out put of production, but the change not proportionate. For the purpose of analysis, S.V.C is split in to Fixed Cost and Variable Cost. S.V.C normally has a fixed cost component, which needs to be incurred irrespective of no. of units produced. Telephone expenses are a example of S.V.C. Telephone exp. Can be split in to a fixed component of a rent that needs to be paid whether or not the telephone is used. The charge for every call made constitutes the variable component.

Two point Method: Under this method, the out put at two different levels is compared with corresponding amount of semi variable expenses. Since fixed costs, the change in amount of expenses is on account of variable costs, divided by the change in out put, and gives the variable costs per unit. If the number of units at a given level of output is multiplied with variable cost per unit, we get the variable proportion in the total amount of expenses at the given level. The difference between the two amounts gives us the ‘Fixed Cost’ component in the semi – variable cost.

Contribution: Contribution is the difference between sales and Variable Costs. Since sales & Variable Cost can be both expressed in P.U. terms, contribution is usually expressed in P.U. terms.
Contribution = Sales –Variable Cost, or
Contribution per unit = Selling Price per unit – Variable Cost per unit, or
Total contribution = Contribution P.U. X No. of Units sold.

P/v Ratio: P/v Ratio stands for Profit /Volume Ratio. However, it is ratio of contribution to sales. It is calculated by applying the following formula:
 P/v Ratio = (Contribution / Sales)*100, or
P/v Ratio = (Sales-Variable Costs)/ Sales*100; or
P/v Ratio = 1 - Variable cost ratio (Variable Cost Ratio is the % of variable cost to sales), or
P/v Ratio = {Change in Profit (contribution)/Change in Sales} * 100.

BEP (Break – Even Point):
BEP (In Rs.) = Fixed Cost / P/V Ratio; or
BEP (In Units) = Fixed Cost / Contribution PER UNIT; or Fixed costs / (Selling Price PER UNIT. – Variable Cost PER UNIT);
BEP (In Rs.) = BEP in Units X Selling Price PER UNIT; or
BEP (In Rs.) = (Fixed Cost X Total Sales)* Contribution.

Desired sales or Desired Profit:
Units to be sold to earn Desired Profit = (Fixed Cost + Desired Profit)/ Contribution PER UNIT.
Desired Sales to earn Desired Profit = (Fixed Cost / Desired Profit) / P/v Ratio.


Margin of Safety (MOS):
MOS (In Rs.)= Total Sales – BEP Sales; or
MOS (In Rs.) =Profit/ PV ratio; or
MOS (In Units) = Profit / Contribution per unit.

Author Details

Kumar Nirmal Prasad is the founder and CEO of Dynamic tutorials and Services. Dynamic Tutorials and Services is a Leading Coaching Centre of Tinsukia District. We provide complete coaching for Commerece and Arts stream from Class 12 to Master Degree level. Also we have statrted coaching for CMA, CA AND CS EXAMS.