Cost and Managerial accounting

Meaning of Marginal costing

Marginal costing is the ascertainment of marginal costs and of the effect on profit of change in volume on type of output by differentiaing between fixed costs and variable costs. Marginal cost can also be termed as Variable cost. Thus marginal costing refers to: 1) Differentiating between fixed cost and variable cost. 2) Ascertainment of marginal cost 3) Finding out the effect on profit due to change in volume or type of output.

Break even point (B.E.P)

The point which breaks the total cost and the selling price evenly to show the level of output or sales at which there shall be neither profit nor loss, is regarded as break- even point. At this point, the revenue of the business exactly equals its cost. Break- even point can be expressed thus: Break- even point(of sales) = fixed

cost P/V Ratio

Contribution

The difference between selling price and variable cost ( i.e. the marginal cost) is known as Contribution or Gross margin or Contribution margin. In other words, fixed costs plus the amount of profit is equivalent to contribution. It can be expressed by the following formula:
Contribution = Selling price Variable cost = Fixed cost + Profit

We can drive from it that profit cannot result unless contribution exceed fixed cost. There is no profit no loss if contribution is equal to fixed costs.

Profit/Volume Ratio (P/V Ratio)

This ratio establishes a reltionship between the contrbution and the sales value. The ratio can be shown in the form of percentage also. The formula can be expressed thus: P/V ratio = Contribution Sales This ratio can also be called as Contribution/Sales ratio.

Cont.
This ratio can also be known by comparing the change in contribution to change in sales or change in profit to change in sales. P/V ratio = change in contribution change in sales

Key factor

It is that factor which is the most important one for taking decision about profitability of a product. Generally on the basis of contribution, the decision regarding product mix is taken. In this decision making contribution has to be consider with key factor for compare the relative profitabiltity. Profitability = Contribution Sales

Margin of Safety
Total sales minus the sales at breakeven point is known as the margin of safety. It can be expressed as a percentage to total sales also. M.S. = T.S. B.E.S As a percentage = margin of safety Total sales It serve as a guide to the strngth of the business.

Cost- Volume- Profit Analysis (CVP analysis)

CVP analysis is an important tool of profit planning. It provide information about the following matters: The behaviour of cost in relation to volume. Volume of production or sales, where the business will breakeven. Sensitivity of profits due to variation in output. Amount of profit for a projected sales volume. Quatity of production and sales for atarget profit level.

1) 2) 3) 4) 5)

CVP analysis may therefore be defined as a managerial tool showing the relationship between various ingredients of profit planning, viz., cost (both variable and fixed), setting price and volume of activity,etc.