MANAGEMENT ACCOUNTING
Comprehensive Study Notes
Unit 3: Marginal Costing
Concept of Marginal Costing and Marginal Cost
Marginal Costing Definition:
Marginal costing is a technique of cost accounting where only variable costs are charged to cost units while
fixed costs are written off against revenue in the period they are incurred.
Key Components:
Variable Cost: Costs that change with the level of production
Fixed Cost: Costs that remain constant regardless of production level
Contribution: Sales - Variable Cost
Profit: Contribution - Fixed Cost
Cost-Volume-Profit (CVP) Analysis
CVP Analysis Applications:
Effect of change in volume on cost and profit
P/V Analysis (Profit-Volume Analysis)
V/C Analysis (Variable Cost Analysis)
Break-even Point determination
Break-even Analysis
Break-even Point Formula:
BEP (in units) = Fixed Cost ÷ Contribution per unit
BEP (in sales) = Fixed Cost ÷ P/V Ratio
Profit-Volume Ratio (P/V Ratio)
P/V Ratio Calculation:
P/V Ratio = (Contribution ÷ Sales) × 100
P/V Ratio = (Change in Profit ÷ Change in Sales) × 100
Margin of Safety
Margin of Safety Formula:
MOS = Actual Sales - Break-even Sales
MOS (%) = (Margin of Safety ÷ Actual Sales) × 100
Practical Examples and Calculations
Example 1: Basic Break-even Calculation
Given: - Current level of production: 8000 units - Selling price per unit: ₹240 -
Variable cost per unit: ₹80 - Fixed cost per unit: ₹90 Solution: Total Revenue = 8000 ×
240 = ₹19,20,000 Variable Cost = 8000 × 80 = ₹6,40,000 Contribution = 19,20,000 -
6,40,000 = ₹12,80,000 P/V Ratio = 12,80,000/19,20,000 × 100 = 66.67% Break-even Point:
Fixed Cost = 8000 × 90 = ₹7,20,000 BEP = 7,20,000 ÷ (240-80) = 7,20,000 ÷ 160 = 4,500
units
Example 2: Multiple Product Analysis
Product Mix Analysis: Units: 8000, 10000, 20000, 50000 Selling price per unit: ₹180
(constant) Variable cost per unit: ₹108 (constant) Contribution per unit: ₹72
(constant) Fixed Cost per unit varies: ₹125, ₹100, ₹50, ₹20 Total Fixed Cost calculation
for each level: - 8000 units: ₹10,00,000 - 10000 units: ₹10,00,000 - 20000 units:
₹10,00,000 - 50000 units: ₹10,00,000
Example 3: Decision Making Problem
Current Position: - Sales: 24000 units @ ₹10 = ₹2,40,000 - Variable cost: ₹7 per unit -
Contribution per unit: ₹10 - ₹7 = ₹3 - Total contribution: 24000 × 3 = ₹72,000 Questions
analyzed: 1. Break-even sales level 2. Impact of price reduction by ₹10,000 3. Effect
of variable cost increase by 10% 4. Units to sell to earn profit of ₹40,000 5. Selling
price for profit of ₹40,000 with 8000 units
Key Learning Points:
Total Variable Cost changes with the level of production
Total Fixed Cost remains constant
Fixed Cost per unit varies from the level of production
At Break-even: Total Revenue = Total Sales
P/V Ratio is also called contribution margin ratio
Advanced Calculations
Price Increase Analysis:
When price increases by 2.375/20 = 4.84%: - Scale margin becomes feasible - New
contribution calculations required - Impact on break-even point assessment needed
Variable Cost Analysis:
Current VC = 100 - 56.25 = 43.75 New calculation scenarios: - S × 43.75% = 15 - S =
15/43.75 = ₹34.285 - New SP = ₹25
Fixed Expense Calculations:
Contribution = Sales × P/V Ratio Fixed Expense = Contribution - Profit Example
calculations: - Contribution: 45,000 × 40% = ₹18,000 - Profit: ₹5,000 - Fixed Expense:
₹18,000 - ₹5,000 = ₹13,000
Comprehensive Problem Solving Approach
Step-by-Step Method:
1. Identify Given Data: Sales volume, prices, costs
2. Calculate Contribution: Sales - Variable Costs
3. Determine P/V Ratio: Contribution/Sales × 100
4. Find Break-even Point: Fixed Cost/P/V Ratio
5. Calculate Margin of Safety: Actual Sales - BEP Sales
6. Analyze Scenarios: Impact of changes in variables