INTRODUCTION:

Marginal Costing is entirely based on the distinction between Fixed Costs and Variable Costs. Marginal Costs classifies the total costs into Fixed Costs and Variable Costs. In Marginal Costing only Variable Costs are charged to the product. Variable Costs vary with level of output and hence are Product Costs. Therefore only variable costs are charged directly to the products. The Fixed Costs are not charged to the product. Fixed Costs are related to period rather than level of output. In Marginal Costing, Fixed Costs, being Period Costs, are directly transferred to the Costing Profit and Loss Account for the relevant period.

Objective of Study:
To study the distinction between a) Relevant cost and irrelevant costs b) Marginal cost and differential cost c) Breakeven point and cost indifference point d) Relevant cost and opportunity cost and g) Traceable cost and common cost. To know the importance of qualitative factors in decision making. The impact of opportunity cost, shadowprice or incremental opportunity cost and imputed cost on decision making.

Research methodology:
The information collected to conduct the research on Marginal Costing is collected from secondary data only.

MARGINAL COSTING AS A COSTING SYSTEM:

Marginal Costing is a type of flexible standard costing that separates fixed costs from proportional costs in relation to the output quantity of the objects. In particular, Marginal Costing is a comprehensive and sophisticated method of planning and monitoring costs based on resource drivers. Selecting the resource drivers and separating the costs into fixed and proportional components ensures that cost fluctuations caused by changes in operating levels, as defined by marginal analysis, are accurately predicted as changes in authorized costs and incorporated into variance analysis. This form of internal management accounting has become widely accepted in business practice over the last 50 years. During this time, however, the demands placed on costing systems by cost management requirements have changed radically. MARGINAL COST In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. It is the cost of producing one more unit of a good. Mathematically, the marginal cost (MC) function is expressed as the first derivative of the total cost(TC) function with respect to quantity (Q). Note that the marginal cost may change with volume, and so at each level of production, the marginal cost is the cost of the next unit produced.

MC= Total Cost\Quantity

In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory. In practice, the analysis is segregated into short and long-run cases, and over the longest run, all costs are marginal.

At each level of production and time period being considered, marginal costs include all costs which vary with the level of production, and other costs are considered fixed costs. A number of other factors can affect marginal cost and its applicability to real world problems. Some of these may be considered market failures. These may include information a symmetries, the presence of negative or positive externalities, transaction costs, price discrimination and others.

Marginal costing definition:

Marginal costing distinguishes between fixed costs and variable costs as convention ally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads. Marginal costing is formally defined as: the accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making. (Terminology.) The term contribution mentioned in the formal definition is the term given to the difference between Sales and Marginal cost. Thus MARGINAL COST = VARIABLE COST DIRECT LABOUR +DIRECT MATERIAL +DIRECT EXPENSE

+VARIABLE OVERHEADS CONTRIBUTION= SALES - MARGINAL COST The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context. Note:- Alternative names for marginal costing are the contribution approach and direct costing In this lesson, we will study marginal costing as a technique quite distinct from absorption costing.

CHARACTERISTICS:
1. Marginal Costing is the ascertainment of Marginal Cost by differentiating between Fixed Costs and Variable Cost. 2. Marginal Costing is also the ascertainment of the effect on profit of changes in the volume and type of output.

Theory of Marginal Costing:

The theory of marginal costing as set out in A report on Marginal Costing published by CIMA, London is as follows: In relation to a given volume of output, additional output can normally be obtained at less than proportionate cost because within limits, the aggregate of certain items of cost will tend to remain fixed and only the aggregate of the remainder will tend to rise proportionately with an increase in output. Conversely, a decrease in the volume of output will normally be accompanied by less than proportionate fall in the aggregate cost. The theory of marginal costing may, therefore, by understood in the following two steps: 1. If the volume of output increases, the cost per unit in normal circumstances reduces. Conversely, if an output reduces, the cost per unit increases. If a factory produces 1000 units at a total cost of $3,000 and if by increasing the output by one unit the cost goes up to $3,002, the marginal cost of additional output will be $.2. 2. If an increase in output is more than one, the total increase in cost divided by the total increase in output will give the average marginal cost per unit. If, for example, the output is increased to 1020 units from 1000 units and the total cost to produce these units is $1,045, the average marginal cost per unit is $2.25. It can be described as follows: Additional cost \Additional units = $ 45 \20 = $2.25

The ascertainment of marginal cost is based on the classification and segregation of cost into fixed and variable cost. In order to understand the marginal costing technique, it is essential to understand the meaning of marginal cost. Marginal cost means the cost of the marginal or last unit produced. It is also defined as the cost of one more or one less unit produced besides existing level of production. In this connection, a unit may mean a single commodity, a dozen, a gross or any other measure of goods. For example, if a manufacturing firm produces X unit at a cost of $ 300 and X+1 units at a cost of $ 320, the cost of an additional unit will be $ 20 which is marginal cost. Similarly if the production of X-1 units comes down to $ 280, the cost of marginal unit will be $ 20 (300280). The marginal cost varies directly with the volume of production and marginal cost per unit remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all variable overheads. It does not contain any element of fixed cost which is kept separate under marginal cost technique. Marginal costing may be defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making. It should be clearly understood that marginal costing is not a method of costing like process costing or job costing. Rather it is simply a method or technique of the analysis of cost information for the guidance of management which tries to find out an effect on profit due to changes in the volume of output. There are different phrases being used for this technique of costing. In UK, marginal costing is a popular phrase whereas in US, it is known as direct costing and is used in place of marginal costing. Variable costing is another name of marginal costing.

Marginal costing technique has given birth to a very useful concept of contribution where contribution is given by: Sales revenue less variable cost (marginal cost) Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F + P). In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed cost (C = F). This is known as break even point. The concept of contribution is very useful in marginal costing. It has a fixed relation with sales. The proportion of contribution to sales is known as P/V ratio which remains the same under given conditions of production and sales.

The principles of marginal costing:

The principles of marginal costing are as follows. a. For any given period of time, fixed costs will be the same, for any volume of sales and production (provided that the level of activity is within the relevant range). Therefore, by selling an extra item of product or service the following will happen. Revenue will increase by the sales value of the item sold. Costs will increase by the variable cost per unit. Profit will increase by the amount of contribution earned from the extra item.

b. Similarly, if the volume of sales falls by one item, the profit will fall by the amount of contribution earned from the item.
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c. Profit measurement should therefore be based on an analysis of total contribution. Since fixed costs relate to a period of time, and do not change with increases or decreases in sales volume, it is misleading to charge units of sale with a share of fixed costs. d. When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred when output is increased.

Features of Marginal Costing:

The main features of marginal costing are as follows: 1. Cost Classification: The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm following the marginal costing technique. 2. Stock/Inventory Valuation: Under marginal costing, inventory/stock for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method. 3. Marginal Contribution: Marginal costing technique makes use of marginal contribution for marking various decisions. Marginal contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments.

Advantages and Disadvantages of Marginal Costing Technique:

Advantages: 1. Marginal costing is simple to understand. 2. By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided. 3. It prevents the illogical carry forward in stock valuation of some proportion of current years fixed overhead. 4. The effects of alternative sales or production policies can be more readily available and assessed, and decisions taken would yield the maximum return to business. 5. It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate. 6. Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost. It is useful to various levels of management. 7. It helps in short-term profit planning by breakeven and profitability analysis, both in terms of quantity and graphs. Comparative profitability and performance between two or more products and divisions can easily be assessed and brought to the notice of management for decision making.

Disadvantages: 1. The separation of costs into fixed and variable is difficult and sometimes gives misleading results. 2. Normal costing systems also apply overhead under normal operating volume and this shows that no advantage is gained by marginal costing. 3. Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from inventories affect profit and true and fair view of financial affairs of an organization may not be clearly transparent. 4. Volume variance in standard costing also discloses the effect of fluctuating output on fixed overhead. Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories. 5. Application of fixed overhead depends on estimates and not on the actual and as such there may be under or over absorption of the same. 6. Control affected by means of budgetary control is also accepted by many. In order to know the net profit, we should not be satisfied with contribution and hence, fixed overhead is also a valuable item. A system which ignores fixed costs is less effective since a major portion of fixed cost is not taken care of under marginal costing. 7. In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the assumptions underlying the theory of marginal costing sometimes becomes unrealistic. For long term profit planning, absorption costing is the only answer.

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Other cost definitions in marginal costing

Fixed costs: Fixed cost are costs which do not vary with output, for example, rent. In the long run all costs can be considered variable. Variable cost: Variable cost also known as, operating costs, prime costs, on costs and direct costs, are costs which vary directly with the level of output, for example, labour, fuel, power and cost of raw material. Social costs: Social costs of production are costs incurred by society, as a whole, resulting from private production. Average total cost: Average total cost is the total cost divided by the quantity of output. Average fixed cost: Average fixed cost is the fixed cost divided by the quantity of output. Average variable cost: Average variable cost are variable costs divided by the quantity of output.

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MARGINAL COSTING AS A MANAGEMENT ACCOUNTING TOOL:

1. Marginal Costing is clearly the core aspect of traditional management accounting. Some of the classical applications of management accounting, however, have begun to lose their significance. The question thus arises: What is the current role of Marginal Costing in modern management accounting. 2. Businesses today frequently voice their disapproval of the traditional cost accounting approaches. At the beginning of the1990s, these criticisms were taken up by researchers involved with the applications of cost accounting concepts. The main thrust of the dissatisfaction with conventional cost accounting methods is that they are too highly developed and too complex, and furthermore are no longer needed in their current form since other tools are now available. Calls for increased use of cost management tools, investment analyses, and value-based tool concepts are frequently associated with criticism of the functionality of current cost accounting approaches as management tools. This line of criticism sees little relevance in traditional cost accounting tasks such as monitoring the economic production process or assigning the costs of internal activities. At their current level of detail, such tasks are neither necessary nor does their perceived pseudo accuracy further the goals of management. The viewpoint of the present author is that cost accounting has by no means lost its right to exist, for it is an easily overlooked fact that the data structure required by the new tools is already present in traditional cost accounting.

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3. To assess the present-day value of Marginal Costing, the changes occurring in the business world must be analyzed more closely. We need first to look at how the purposes of cost accounting are shifting before we can determine its significance. (i) cost planning takes precedence over cost control. The effort involved in planning and monitoring costs is increasingly being seen as excessive. The charge levied against traditional cost accounting--that its complex cost allocations merely generate a kind of pseudo precision-lends further credence to this assessment. An alternative increasingly being called for is to control costs through direct activity/process information (quantities, times, quality) for cost management at local, decentralized levels instead of relying on delayed and distorted cost data. In particular, empirical U.S. research on appropriate variables for performance measurement, in the context of continuous improvement and modern managerial concepts, is based on this view. The need for exact cost planning for profitability management is thus touched on ex ante. (ii) cost accounting must be employed as a tool for cost control at an early stage. The relative significance of traditional cost accounting as a management accounting tool will decline as it is applied mainly to fields where costs cannot be heavily influenced. More significant than influencing the current costs of production with cost center controlling and authorized-actual comparisons of the cost of goods manufactured is timely and market-based authorized cost management. The greatest scope for influencing costs is at the early product development phase and when setting up the production processes. At the same time, this is the stage where cost information is most urgently needed since the time and quantity standards as defined by Bills of Materials (BOMs) and production routings are still lacking. This requires different methods of cost planning than those normally provided by Marginal Costing.

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(iii) the behavioral effect of cost information is starting to be recognized. There is a strong current of accounting research in the U.S. that takes human psychological factors into consideration. This is resulting in an extension of cost theory beyond its pure microeconomic basis. Results of theoretical and empirical research based, for example, on the principal-agent theory indicate that knowledge of the "relevant" costs does not always lead to the optimization of overall enterprise profitability. Hence, the perspective that formed the basis for the absorption costing issue has changed. Theories according to which cost allocations can contain information and increase the efficiency of the use of available capacity, or where future allocations can influence ex-ante decisions, require empirical research. 4. The shift in the purposes of cost accounting is being accompanied by a shift in the main applications of standard costing. Costing solutions for market-oriented profitability management and life-cycle-based planning and monitoring should be developed further. They should be implemented both in indirect areas and at the corporate level. In addition, cost accounting must be integrated into performance measurement. Competitive dynamics are giving rise to an increasing differentiation of market-based profitability controlling. This applies to the management of the profitability of products and product lines, as well as distribution channels and increasingly customers, customer groups, and markets. The information required for this purpose can only be supplied by multilevel and multidimensional marketing segment accounting based on contribution margin accounting. Long-term cost planning based on the idea of lifecycle costing isgaining in prominence compared with short-term standard costing. Product decisions are increasingly based on more than just the cost of goods manufactured and sales costs and now tend to include pre-production

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costs (such as development costs) and phasing-out costs(such as disposal costs). Product decisions are viewed strategically. Whether or not a product is successful is determined by the amortization of its overall cost. Furthermore, the cost and revenue trend forecasts should be more dynamic to support the life cycle pricing policy. This shift in cost and revenue planning is moving cost and revenue accounting in the direction of investment-related calculations. As management accounting is increasingly applied to the growing share of the costs of indirect areas, the tool requirements increase. After J. G. Miller's and T. E. Vollmann's discovery of the "hidden factory" as an area whose costs are neglected by conventional production costing in the U.S., it was only a small step to the identification of the lost relevance of conventional cost accounting by H. T. Johnson and R. S. Kaplan and their call to develop accounting systems separated into "process control, product costing, and financial reporting," which eventually led to activity-based costing. Improving the cost transparency of indirect activity areas through Marginal Costing requires a thorough understanding of the output processes. Analysis frequently shows that even many support activities have a wide range of repetitive processes for which planning and cost allocation using drivers is worthwhile, providing the cost-volume is large enough. For this purpose, the different operations in the cost centers must be identified, for which resource consumption is then planned and tracked. The number of these operations is used as the driver. This process of costing operations using proportional costs competes with the attempt to achieve better cost transparency in indirect areas with process costing tools to also improve the planning and control of costs that were previously budgeted only as a lump sum.

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Industrial production and marketing are increasingly being handled by groups of affiliated companies. To plan and monitor the costs of these activities calls for the establishment of independent group cost accounting. This necessity results mainly from the requirements of inventory valuation, the costing basis of transfer prices, and to further the consistency of corporate cost accounting. Group cost accounting leads to the definition of independent group cost categories. Marginal Costing and its tools have been developed for individual companies and are the suitable platform for this expansion. Performance measures are gaining increasing prominence in decentralized management accounting. Standard U.S. management books devote a great deal of space to performance measurement in the broad sense of the word. The concept is broad for the reason that performance measurement is accompanied by the provision of decision-support information, the management of business units, and the use of incentive systems. Using modeling and empirical research, the exponents of this area are developing the idea that monetary factors are not the only possible components of performance measurement. Since the 1980s there has been a growing consciousness of the significance of continuously improving the performance capabilities of the company, resulting in the increased importance of nonmonetary indicators. The recent literature on performance measurement has focused on problems in the following areas: The usability of performance information for managers, The assessment of teamwork, The motivational effects of performance measurement, The strategic dimension. The tenor of the recent investigations into performance measurement reflects the general criticism of management accounting voiced by Johnson and Kaplan in Relevance Lost. It was recognized that short-term accounting information is insufficient to
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evaluate and control company activities effectively. In particular, it was acknowledged that the use of standard costs does not adequately take performance improvements into consideration. Moreover, the conventional allocation approach based on the operating rate encourages high utilization of capacity at any cost, underestimates the problem of increasing numbers of variants, uses the wrong overhead allocation base, and fails to appreciate interdepartmental interrelationships.

While top management benefits most from financial success indicators that it examines in monthly or longer intervals and that can consist of multidimensional aggregate figures, lower management must necessarily be concerned mainly with nonfinancial, operational, and very short-term data at the day or shift level. In concrete terms, measures in the categories of time, quantity, and quality--such as equipment downtime, lead time, response time, degree of utilization (ratio of actual output quantity to planned output quantity), sales orders, and error rate-are becoming increasingly significant for controlling business processes. In the strategic dimension, the Balanced Scorecard developed by Kaplan and Norton--which links financial and nonfinancial indicators from different strategically relevant perspectives including cause-effect chains--is the main proposal under consideration for performance measurement. The Balanced Scorecard links strategic contingencies to financial measures, incorporates success factors of the future, and explicitly includes monetary and non monetary parameters. The Balanced Scorecard therefore provides a framework for systematic mapping and control of the critical success factors for an enterprise. A Balanced Scorecard is a system that defines objectives, measures, targets, and initiatives for each of the four perspectives of financial, customer, internal business process, and learning and growth. Further analyses and experience in

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measuring performance can enable identification and assessment of cause-effect relationships within the four perspectives (such as the effect of delivery time on customer satisfaction) and between the perspectives (such as the effect of customer satisfaction on profitability). The knowledge so gained may eventually lead to are formulation of strategy. In the context of comprehensive performance measurement, even short-term costs and financial results can serve as control instruments for strategic enterprise management, such as a lower authorized cost of goods manufactured as a benchmark. Concrete planned costs and planned results must be rigorously derived from higher-level target factors so that specific requirements can be derived in turn when they are broken down into smaller organizational units for the time and quantity standards. Information for decision making the need for a decision arises in business because a manager is faced with a problem and alternative courses of action are available. In deciding which option to choose he will need all the information which is relevant to his decision; and he must have some criterion on the basis of which he can choose the best alternative. Some of the factors affecting the decision may not be expressed in monetary value. Hence, the manager will have to make 'qualitative' judgments, e.g. in deciding which of two personnel should be promoted to a managerial position. A 'quantitative' decision, on the other hand, is possible when the various factors, and relationships between them, are measurable. This chapter will concentrate on quantitative decisions based on data expressed in monetary value and relating to costs and revenues as measured by the management accountant.

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THE BASIC DECISION MAKING INDICATORS INMARGINAL COSTING:

1. PROFIT VOLUME RATIO 2. BREAK- EVEN POINT 3. CASH VOLUME PROFIT ANALYSIS 4. MARGIN OF SAFETY 5. INDIFFERENCE POINT 6. SHUT DOWN POINT

ii.

PROFIT VOLUME RATIO (P\V RATIO ):

The profit volume ratio is the relationship between the Contribution and Sales value. It is also termed as Contribution to Sales Ratio Formula : P V Ratio = Contribution X 100\Sales Significance of PV Ratio It is considered to be the basic indicator of profitability of business. The higher the PV Ratio, the better it is for the business. In the case of the firm enjoying steady business conditions over a period of years, the PV Ratio will also remain stable and steady. If PV Ratio is improved, it will result in better profits. Improvement of PV Ratio By reducing the variable costs. By increasing the selling price By increasing the share of products with higher PV Ratio in the overall sales mix. produces a number of products). Use of PV Ratio (where a firm

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 To compute the variable costs for any volume of sales To measure the efficiency or to choose a most profitable line. The overall profitability of the firm can be improved by increasing the sales/output of product giving a higher PVRatio. To determine the Break Even Point and the level of outputrequired to earn a desired profit. To decide the most profitable sales mix.

ii.

BREAK EVEN ANALYSIS:

Break-Even Analysis is a mathematical technique for analyzing the relationship between sales and fixed and variable costs. Break-even analysis is also a profit-planning tool for calculating the point at which sales will equal total costs. The break-even point is the intersection of the total sales and the total cost lines. This point determines the number of units produced to achieve breakeven. The analysis generally assumes linearity (100% variable or100% fixed) of costs. If a firms costs were all variable, the firm could be profitable from the start. If the firm is to avoid losses, its sales must cover all costs that vary directly with production and all costs that do not change with production levels. Fixed costs are those expenses associated with the project that you would have to pay whether you sold one unit or 10,000 units. Examples include general office expenses, rent, depreciation, interest, salaries, research and development, and utilities. Variable costs vary directly with the number of units that you sell. Examples include materials, direct labour, postage, packaging, and advertising. Some costs are difficult to classify. As a general guideline, if there is a direct

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relationship between cost and number of units sold, consider the cost variable. If there is no relationship, then consider the cost fixed.

A break-even chart is constructed with a horizontal axis representing units produced and a vertical axis representing sales and costs. Represent fixed costs by a horizontal line since they do not change with the number of units produced. Represent variable costs and sales by upward sloping lines since they vary with the number of units produced and sold. The break-even point is the intersection of the total sales and the total cost lines. Above that point, the firm begins to make a profit, but below that point, it suffers a loss. The algebraic equation for break-even analysis consists of four factors. If you know any three of the four, you can solve for the fourth factor. You calculate the break-even amount with the following equation: Sales Price per Unit * Quantity Sold = Fixed Costs + [Variable Costs per Unit * Quantity Sold] For example, assume you have total fixed monthly costs of $1200 and total variable costs of $6 per unit. If you could sell the units for $10 each, the equation indicates that you need to sell 300 units to break even. If you knew you could sell 400units, the equation would indicate that the sales price would need to be $9 per unit to break even. When managing inventory, you should aim for the Economic Order Quantity (EOQ). This is the level of inventory that balances two kinds of inventory costs: holding (or carrying) costs, which increase with the amount of inventory ordered, and order costs, which decrease with the amount ordered.

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 The largest components of holding costs for most companies are the cost of space to store the inventory and the cost of tying up capital in inventory. Other components include the labour cost associated with inventory maintenance and insurance costs. Also include deterioration, spoilage and obsolescence costs. The costs of more frequent orders include lost discounts for larger quantity purchases and labour and supply cost of writing the orders. Additional costs includepaying the bills and processing the paperwork, associated telephone and mail costs, and the labour costs of processing and inspecting incoming inventory. EOQ is the size of order that minimizes the total of holding

and ordering costs. The algebraic expression of EOQ is as follows: EOQ = square root of [2*U*O divided by H] where U is the number of units used annually, O is the order cost per order, and H is the holding cost per unit. For example, assume you use 40,000 units annually, it costs

$50 to place an order, and it costs $20 to hold the raw materials for one unit. The equation yields an amount of 447, which is the number of units you need to order at one time to minimize total costs. The reorder point, or Economic Order Point (EOP), tells you when to place an order. Calculating the reorder point requires you to know the lead time from placing to receiving an order. You compute it as follows: EOP = Lead time * Average usage per unit of time For example, assume you need 6400 units evenly throughout the year, there is a lead time of one week, and there are 50 working weeks in the year. You calculate the reorder point to be 128 units asfollows.1 week * [6400 units / 50 weeks] = 128 units You might also consider Just In Time inventory management, if available and appropriate. Just In Time allows you to keep minimal

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inventory in stock. You only order when you make a sale. Carefully analyze the time lag. You must be able to satisfy the customer as well as keep your inventory investment minimized.

Limitations of BEP Analysis: Break-even analysis is only a supply side (i.e. costs only)analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices. It assumes that fixed costs (FC) are constant It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. (I.e. linearity) It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e ., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period). In multi-product companies, it assumes that the relativeproportions of each product sold and produced are constant ( i.e., the sales mix is constant).

ii.

COST VOLUME PROFIT ANALYSIS:

Analysis that deals with how profits and costs change with a change in volume. More specifically, it looks at the effects on profits of changes in such factors as variable costs, fixed costs, selling prices, volume, and mix of products sold.

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CVP analysis involves the analysis of how total costs, total revenues and total profits are related to sales volume, and is therefore concerned with predicting the effects of changes in costs and sales volume on profit. It is also known as breakeven analysis. By studying the relationships of costs, sales, and net income, management is better able to cope with many planning decisions. For example, CVP analysis attempts to answer the following questions: (1) What sales volume is required to break even? (2) What sales volume is necessary in order to earn a desired (target) profit? (3) What profit can be expected on a given sales volume? (4) How would changes in selling price, variable costs, fixed costs, and output affect profits?(5) How would a change in the mix of products sold affect the break-even and target volume and profit potential? Cost-volume-profit analysis (CVP), or break-even analysis, issued to compute the volume level at which total revenues are equal to total costs. When total costs and total revenues are equal, the business organization is said to be breaking even. The analysis is based on a set of linear equations for a straight line and the separation of variable and fixed costs. Total variable costs are considered to be those costs that vary as the production volume changes. In a factory, production volume is considered to be the number of units produced, but in a governmental organization with no assembly process, the units produced might refer, for example, to the number of welfare cases processed. There are a number of costs that vary or change, but if the variation is not due to volume changes, it is not considered to be a variable cost. Examples of variable costs are direct materials and direct labour. Total fixed costs do not vary as volume levels change within the relevant range. Examples of fixed costs are straight-line depreciation and annual insurance charges.
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ii.

MARGIN OF SAFETY:

Margin of safety represents the strength of the business. It enables a business to know that what is the exact amount he/ she has gained or loss over or below break even point).Margin of safety = (sales break-even sales) / sales) x 100% If P/V ratio is given then sales/ p\v ratio In unit sales If the product can be sold in a larger quantity that occurs at the breakeven point, then the firm will make a profit; below this point, a loss. Break-even quantity is calculated by: Total fixed costs / (selling price average variable costs).Explanation in the denominator, price minus average variable cost is the variable profit per unit, or contribution

5. SHUT DOWN PROBLEMS: Shut down point indicates the level of operation (sales), below which it is not justifiable to pursue production. For this purpose fixed expenses of a business are classified as (ii) avoidable or discretionary fixed costs

(ii) unavoidable or committed fixed costs. The focus of shut down point calculation is to recover the avoidable fixed costs in the first place. By suspending the operations, the firm may save as also incur some additional expenditure. The decision is based on whether contribution is more than the difference between the fixed expenses incurred in normal operation and the fixed expense incurred when the plant is

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shut down. A firm has to close down if its contribution is insufficient to recover even the avoidable fixed costs.

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CONCLUSION:
Marginal Cost is the change in the cost. It is the cost of the Marginal Unit. It is the cost of doing or not doing a certain thing. Marginal Cost is thus the cost of an option. Clearly, therefore, Marginal Cost helps the management in ascertaining the cost of an option and taking decisions as to which option to accept or reject.

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Bibliography: Websites:
www.google.com www.Wikipedia.com www.scribd.com www.oppapers.com

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