MANAGEMENT
ACCOUNTING
2020-2023
APPLICATION OF MARGINAL COSTING TECHNIQUE WITH
REFERENCE TO 'D-Code'
FY C
Aarav Shah 1201
Ansh Agarwal 1212
Nilesh Jaiswal 1222
Samyak Jain 1275
Sejal Bhoruka 1277
Supriti Rajput 1287
Yash Sachdev 1296
1
INDEX
1. D-code 3
2. Objectives 4
3. Data Collection 5
4. Financial Report 6
5. Analysis, Interpretation, Limitations &
Suggestions 9
6. Questionnaire 17
7. Proof 18
D-Code
D-CODE, founded in 1990 by Mr. Kamal Mehta as a Sole Trading garment manufacturing
business, is now a partnership having a wide portfolio of men trousers. The firm has its factory
based in Parel, Mumbai. The facilities comprise of switching, finishing, price-tagging and dying
machines with the capacity of 19,200 and 11 employees in 2019. Initially, it focused on objectives
such as quality control, establishing a brand image and due to these factors, their sales have been
growing throughout the years, becoming ₹6,65,00,000 in 2019. Their mission is “to provide good
quality men’s wear garment to the aspirational class” as quoted by the owner.
Currently D-CODE has about 86% of its production being outsourced. The firm’s trouser
portfolio includes bold, corporate and brando fit formals along with peach, perfume, elasto-grip and
normal chinos. The firm wishes to rationalise its product portfolio to come up with strategies for
each of the product, including which ones to manufacture and which to outsource.
The information by the owner and the managers gave integral
knowledge of the market and provided financial data. Customer
perception survey and observations help understand the quality,
Parel, Mumbai fit, colours and price that they prefer for each product. It also helps
understand D-code’s current position in the market.
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OBJECTIVES
By the means of the given assignment, we aim to learn the fundamentals of the thesis of
costing and marginal costing. This way, we students would be able to understand the
concept, the reasons for the practice of marginal costing and the significance in the fields
of real business.
We also aim to understand the basics of practical implementation of the concepts of
marginal costing in the real world. This way, we tend to learn how the concepts are being
implemented taking a real life example, i.e. 'D-Code'. Also, this also helps us learn the
process of implementation of these techniques.
Also, one of the objectives of the given assignment is to learn what does cost control mean
to management of any business and how does it help in the growth of the business. This
also would help us understand the significance of cost accounting as a part of management
accounting.
4
DATA COLLECTION
5
For year ending 2020
FINANCIAL
REPORT
6
The partnership ‘D-code’ has been analysed on the basis of multiple financial statements. These
financial statements include not only the ones which are necessary to be maintained as per
accounting needs, but also which are meant for informal analysis for the sake of owners.
1. Production Data
Table 1 (Record of In-House & Outsourced Production)
By looking at Table 1, we can ascertain that the firm is not able to manufacture its products all by
themselves. More than 80% of their production is outsourced for over 3 years. This means that
there is a need to expand in-house production facilities and capacities. Doing this might not only
save cost and time, but would also give more control to the firm.
Table 2 (Calculation of In-House Cost & Outsourced Cost)
By looking at Table 2, we can ascertain that producing more of formals would reduce costs due to
economies of scale. And, starting to produce chinos would surely reduce cost of outsourced
margins, i.e. around ₹60 per piece. Also, expanding production would not cost a lot since only
few sewing machines and labour would need to be added. Also, other machinery like washers
need not be
bought more.
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2. Profit & Loss Account
Table 3
3. Balance Sheet
Table 4
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ANALYSIS
OF PROVIDED
DATA
9
CONTRIBUTION ANALYSIS
Variable Costs
Contribution Analysis per Unit
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Findings from Contribution Analysis
The definition of contributions is the excess of sales over variable cost. Naturally,
the total contributions are determined by multiplying the per unit contribution to the
volume of sales.
Here, contributions are found to be higher, this could be a result of increased sales.
In FY 2018-19 sales were ₹83,28,058 and the variable cost was ₹5,40,70,542 which
resulted in the total contribution of ₹83,28,058
In FY 2019-20 sales were ₹6,65,00,000 and the variable cost was ₹5,80,30,320
which resulted in the total contribution of ₹84,69,680.
Hence there is an increase of ₹141,655 in the contribution from FY 2019-20 to 2021
This means there is an increase of 1.6% in the contribution. However, the
contribution has not increased with the same proportion as the sales. Here, there is a
change in the variable cost of ₹39,59,778. Whereas, change in sales is ₹41,01,400.
The percentage change in the variable cost is 7.32%. Whereas, the percentage
change in revenue is 6.57%. This shows that the percentage change in variable cost
is higher as compared to change in sales. This clearly shows that there would have
been a decrease in profitability as well. To reduce the variable cost D-code must
increase it’s economies of scale, for example try asking for discounts on bulk
buying. Further is discussed under the upcoming topic.
Importance:
1. It helps in understanding the contribution of individual business lines or
different products. As in the above case, it is helping us understand that which
product line holds more importance as compared to others.
2. It is done to understand the strong and weak points of the business or the
product. As in the case discussed, we are able to determine which product is
costing more and is bringing more profit.
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PROFIT/VOLUME ANALYSIS
The Profit-volume ratio indicates the relationship between contribution and sales and is usually
expressed in percentage.
P/V RATIO = CONTRIBUTION / SALES
Findings from Profit Volume Analysis
P/V ratio is influenced by sales and variable cost. If the sale price increases without a
corresponding increase in variable cost, the contribution increases and the P/V ratio improves.
Similarly, if the marginal cost is reduced with sale price remaining same P/V ratio improves
The P/V ratio has decreased in the two years from 13.34% to 12.73%. It is evident that the
decrease is due to the rise in the variable cost.
This decrease by 0.61% in the P/V ratio indicates that the company is improving its sales however
D-code needs to control its variable costs.
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BREAKEVEN ANALYSIS
In business accounting, the break-even point refers to the amount of revenue necessary to cover the
total fixed and variable expenses incurred by a company within a specified time period.
Variable Cost
Fixed Cost
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Breakeven Analysis
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Breakeven Analysis for both Inhouse & Outsourced Units
Findings & Suggestions from Breakeven Analysis
The Break even point has increased by ₹27,75,873 due to increase in fixed cost. There is a
significant difference in the ratio of changes in fixed cost and contribution margin. This led to a
slight increase in break even point.
This shows that since the business has acquired more machinery and increased their fixed capital,
they need to increase their sales in a proportionate ratio so as to achieve a no profit and no loss
situation.
This might have been a bad situation for D-code. However, since they were producing at their full
capacity already, increase in break even point also depicts their increase in potential. So, in such a
case, it is a good notation.
D-code is in a good position at this moment as it does have a healthy margin of safety since the
actual sales are more than the break-even sales; for both the years. We can see that margin of
safety improved even when the breakeven point increased. This shows an acceleration in the sales
of the firm, thus resulting in a good position of the firm.
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Limitations with regards to Findings
Breakeven charts are constructed assuming that all goods produced are actually sold which is not
the case in real life.
Fix costs only remain constant if the sales of production does not change. This too is not the case in
real life.
Breakeven chart concentrates on breakeven point of production but there are many other aspects
that the owner needs to consider. This specially applies in the case of D-code as it is a garment
manufacturing firm and there are many factors involved like wastage, quality, etc.
It is assumed that cost and revenue curves are constructed as a straight line. This doesn't represent
the fluctuating profits of firms as in case of D-code. For example, increase in capacity of output
without hiring new personnel may include overtime wages. It is also in the case of D-code.
Suggestions for Decreasing Cost
The
.. problem with D-code is that the percentage change in the variable cost is more than the sales.
To reduce the cost D-code can do the followings:
1. Find out which of them are the most or the least cost-effective. Cut down on those that give
you the least profits, while investing more on those products that are the most lucrative.
2. Try achieving economies of scales to reduce the costs. For example bulk buying and finding
cheaper outsource manufacturers like finding a manufacturer in Gujarat rather than Mumbai.
To conclude, we have learnt the various concepts in Marginal Costing like Contribution analysis,
Cost-volume-profit analysis, P/V ratio, break-even analysis and Margin of safety by analyzing
the financial reports of D-code for a period of two years.
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QUESTIONNAIRE
[Link] are the vision and the mission of the D-code?
- Our mission statement at D-code is “to provide good quality men’s wear garments to the aspirant class” and
our vision is “to be India’s most respected brand that meets the customer's expectation”. We strive to provide
excellent quality products and services.
2. How many employees does D-code have?
- We have 11 employees, including my sons both working manages. My son Shivam is the sales manager
while the other son Vishal is the operation manager.
3. What are the product-lines that D-code sells?
- We first started with corporate and brando fit formals and then we started producing normal chinos. As the
market changed and the taste of the consumers changed, we invented bold fit formals, peach wash chinos,
perfume wash chinos and elasto-grip chinos. This is mainly done to attract more of the youth audience.
4. What is the growth rate of the D-code?
- Every year our sales have been growing at and with my sons coming in, I vision my firm to reach new
heights.
5. How much percentage of the production is outsourced?
- Currently, the ratio is around 14:9. 14% in-house and the rest outsourced. we did this because our sales
increased but we were not able to satisfy the demand of the customers with our own machines
6. What is the procedure for the outsourced product?
- We contract companies to manufacture a particular product at a fixed quantity. These contracts are short
term. We send the fabric to the outsourcing companies and they manufacture a finished product that is
directly supplied to the market. The price of the fabric is subjective to the quality and quantity bought, along
with many of the contracts with the outsourcing company.
7. Since we have talked about outsourcing, do you think outsourcing is a problem for your firm as it costs
you a lot as per the report provided by you? And, what else do you think are the problems with the firm?
- Well, I believe that outsourcing is not the best option for us. Also, when I started the firm, we were actually
manufacturers. Now, were are more of retailers. Outsourcing has increased our costs. Though, we don not
have any other option right now, I am still thinking about installing some of the machinery which would
reduce the outsourcing and their costs would be covered over-time. I have some of the new machinery
already at our factory. However, since last year we have been unable to install them due to frequent closures
of the factory. Also, I believe that we can decrease some of the costs operational costs like power,
maintenance, etc. by just installing the new machinery.
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PROOF
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