MARGINAL COSTING -BEP

What is Marginal Costing?

Marginal Costing is the Additional cost of producing one additional units

What is Absorption costing?

“absorbs” all the costs of manufacturing a product including both fixed and variable costs.

A method of costing a product in which all fixed and variable costs are apportioned to cost
centres
What is Break Even Point ?

Break-Even-Point :is the point at which Business makes No Profit And incurs No loss

It is the point of No profit and No Loss

 Break Even Point[BEP} represents the Volume of sales required to cover up all
the business expenses.
 It determines the sales level at which total cost = sales revenue.
 It is a point at which business neither makes profit nor loss incurred.

[BEP]=Fixed costs / selling Price – variable costs per unit.

What is Break Even Analysis?

 It analyze the relationship between sales revenue and cost in relation to sales
volume.
 It’s a very generalized approach for dealing with profit planning and forecasting.
 Its helps in deciding factors , evaluating the percentage financial yield from a
project.
 Break even Analysis can be used in finding the selling price which would prove
most profitable for the firm.

Break-Even Chart

Break-Even Chart is the most useful graphical representation of marginal costing. It converts
accounting data to a useful readable report. Estimated profits, losses, and costs can be
determined at different levels of production. Let us take an example.
Margin of safety (MOS) is the excess of budgeted or actual sales over the break even volume of
sales

What is Cost Volume of Sales Profit (CVP)?

 It analyse how cost & profit change when changes arise in volume of productions.
 It analyse the impact of changes in sales, profit & cost.
 It helps the business to find out the most profitable product or service among the
best profitable product or service offered to customers.
 To understand CVP- we need to understand i). Break Even Concept, ii). Concept
of contribution margin.

What is contribution ?

 It is determined by deducting the variable cost from sales revenue.

  It’s a contribution towards fixed cost & profit.
FORMULA : CONTRIBUTION = SALES – VARIABLE COST.

What is Margin of Safety ?

It represents sales above break-even point sales

Margin of safety is the excess of sales over the Break Even Sales. It’s the difference
between the actual sale and Break Even Sale .

FORMULA :
Margin of safety = Actual Sales – Break Even sales.
OR
Margin of Safety = Profit/PV ratio

BREAK EVEN ANALYSIS AND BREAK EVEN POINT :

Break even analysis is a method of studying relationship between revenue and costs in
relation to sales volume of a business enterprise and determination of volume of sales at which
total costs are equal to revenue. According to Matz curry and frank "a break -even analysis
determines at what level cost and revenue are in equilibrium". Thus , break even analysis refers
to system of determination of that level of Activity is generally termed as break -even point
(B.E.P). At the break even point a business man neither earns any profit nor incurs any loss.
Break even point is also called "No profit, no loss point" or “Zero profit & Zero loss point".

2. SIGNIFICANCE OF BREAK EVEN CHART AT VARIOUS LEVELS OF ACTIVITY :

(1) The break even chart shows the fixed costs variable costs and total costs.
(2) The chart shows the sales units and sales value at which sales revenue is equal to total
costs. in other words it shown the break even point at which there is no profit or loss.
(3) The chart shown the profit/loss at various volumes.
(4) Margin of safety is clearly shown.
(5) The chart also shown the angle of Incidence Which is the difference between total
cost line and sales line on the Graph.

3. ASSUMPTIONS OF BREAK EVEN CHARTS :

(1) Costs are classified into fixed and variable
(2) Variable Costs directly change in proportion to output.
(3) Fixed costs remain constant at all levels of activity.
(4) Selling price is same at different level of output.
(5) No change in product Mix.
(6) Level of efficiency and management policy do not change.
(7) There are no opening and closing stocks since the entire units produced are sold

Format

Actual sales

Sales XX

(-) Variable Cost XXX

Contribution XXX

(-) Fixed Cost XX

Profit or Loss XX

Break Even Point Sales

Sales XX

(-) Variable Cost XX

Contribution XXX

(-) Fixed Cost XX

Profit or Loss 0

Break Even Point( Formula)

(Volume in units) Sales / Value in Rs

Fixed cost x Sales

Fixed cost
Contribution per unit Contribution

(Or) (Or)

BEP Sales Fixed cost

Selling price per unit Profit volume ratio

(Or)
BEP sales/ Selling price per unit

BEP unit x selling Price Unit

------------------------------------------------

Profit Volume Ratio(p/v ratio)

= Contribution x 100
Sales

(Or)

= Contribution per unit x 100

Sales price per unit

(Or)

= Charge in Profit x 100

Charge in Sales

----------------------------------------------------------

MARGIN OF SAFETY (MES)

= Actual sales – BEP Sales
(Or)
= Profit
P/V ratio

-----------------------------------------------------------------------
DESIRED PROFIT (DP) / REQUIRED SALES
VOLUME/units VALUE( Rs)

Fixed cost + Desired profit Fixed cost + Desired profit

Contribution per unit Profit Volume Ratio

Additional Formula

Contribution = sales – variable cost

(Or)
 = sales X PV ratio

Fixed cost = contribution – profit

Profit = contribution - Fixed Cost

=============================================

Problem

1.Calculate BEP

Sales 6,00,000
Fixed Cost 1.50.000
Variable cost :
Direct material 2,00,000
Direct labor 1,20,000
Other variable expenses 80,000

2.From the following data calculate:

a) P/V Ratio b) BEP, c) Margin of safety
Rs
Sales 10,00,000
Fixed expenses 4,00,000
Variable cost 4,00,000

3. From the following data calculate:

b) P/V Ratio b) Variable cost c) Profit
Rs
Sales 80,000
Fixed expenses 15,000
Break-even point 50,000
a) Calculation of P/V Ratio:
Break-even point = Fixed cost/ P/V Ratio
50,000 = 15,000/ P/V
P/V Ratio = 15,000/50,000 = 3/10 (OR) 30%

b) Calculation of Variable cost:

Contribution = Sales X P/V
 = 80,000 X 30/100 = Rs. 24,000
Variable cost = Sales – Contribution
= 80,000 – 24,000 = Rs. 56,000

C) Calculation of Profit:
Profit = Contribution – Fixed cost
= 24,000 – 15,000 = Rs. 9,000

4.From the following information relating to palani bros. Ltd., you are required to find out. P/V
Ratio B) Break-even point c) Profit d) Margin of safety e) Volume of sales to earn profit of Rs.
6,000.
Rs
Total fixed costs 4,500
Total Variable cost 7,500
Total sales 15,000

Marginal cost and contribution statement

Particulars Amount

Sales 15,000
Less: Variable cost 7,500
Contribution 7,500
Less: Fixed cost 4,500
Profit 3,000

a) P/V Ratio = Contribution/Sales X 100

= 7,500/15,000 X 100
= 50%
b) Break even sales = Fixed expenses/ P/V Ratio
= 4,500/50% = Rs 9,000
c) Profit = Rs 3,000
 d) Margin of safety = Sales – Break even sales
= 15,000 - 9,000 = Rs 6,000

e Sales to earn profit of Rs 6,000

Required Sales = Fixed cost + Required profit/ P/V Ratio

= 4,500 + 6,000 / 50% = Rs 21,000

5.The sales turnover and profit during two years were as follows.
Year Sales Profit
Rs. Rs.
2007 1,40,000 15,000
2008 1,60,000 20,000

(a) P/V Ratio

(b) Break-even point
(c) Sales required to earn a profit of Rs. 40,000
(d) Fixed expenses and
(e) Profit when sales are Rs. 1,20,000

When sales and profit or sales and cost of two periods are given, the P/V Ratio is obtained by
using the `Change formulae’.
Fixed cost can be found by ascertaining the contribution of one of the periods given by
multiplying sales with P/V Ratio. Then, contribution – Profit can reveal the fixed cost.
Ascertaining P/V ratio using the change formula and finding fixed cost are the essential
requirements in these types of problems.
Change in profit
(a) P/V Ratio = -------------------------- X 100
Change in sales
Change in profit = 20, 000 - 15,000 = Rs. 5,000
Change in sales = 1,60,000- 1,40,000 =Rs. 20,000

5,000
P/V Ratio = ------------- X 100 = 25%
20,000

Fixed expenses
(b)Break even point= -------------------------
P/V Ratio
Fixed expenses = Contribution - Profit
 Contribution = Sales x P/V Ratio
25
Using 2007 sales, contribution =1,40,000 x ----- = Rs.35,000
100
Fixed expenses = 35,000 – 15,000 = Rs. 20,000
Note: The same fixed cost can be obtained using 2008 sales also.
20,000
Break even point = ------------ = Rs. 80,000
25%

(c) Sales required to earn profit of Rs. 40,000

Required profit + Fixed cost

Required sales = ------------------------------------------
P/V Ratio
40,000 + 20,000
=------------------------ = Rs. 2,40,000
25%
(d) Fixed expenses= Rs. 20,000 (as already calculated)
(e) Profit when sales are Rs. 1,20,000

Contribution = Sales x P/V Ratio

25
= 1,20,000 x -------- = Rs. 30,000
100
Profit = Contribution – Fixed cost
= 30,000 – 20,000
= Rs. 10,000

6.From the following information, calculate.

(a) BEP
(b) Margin of safety
(c) Contribution and
(d) Profit
RS.
Fixed cost 36,000
Variable cost 60,000
Sales 1,20,000
Sales in unit 40,000
Solution:
Marginal cost and contribution statement
particulars RS. RS.
Sales 1,20,000
Less: variable cost 60,000
Contribution 60,000
Less: fixed cost contribution 36,000
24,000

contribution
P/v ratio = × 100
sales
60,000
= ×100 =50%
1, 20,000
¿ cost
× 100
BEP =p
ratio
v
36,000
= ×100 =RS.72,000
50
Marginal of safety =sales-BEP sales
=1,20,000-72,000
=RS.48,000.

7.Assuming that the cost structure and selling prices remain the same in
periods I and II find out:

(i) P/V ration

(ii) Break Even sales
(iii) Profit when sales are Rs.1,00,000
(iv) Sales required to earn a profit of Rs. 20,000

Period Sales (Rs.) Profit (Rs.)

I 1,20,000 9,000
II 1,40,000 13,000

Solution:

Particulars Sales Profit

I year 1,20,000 9,000
II year 1,40,000 13,000
 20,000 4,000

Difference in profit
(i) P/V ratio = X 100
Difference in sales

4,000
= X 100
20,000

= 20 %

Fixed cost
(ii) Break even Sales = X 100
P / V ratio

15,000
= X 100 = Rs.75,000
20

Fixed cost = Contribution – Profit

= 24,000 – 9,000 = 15,000
Contribution = Sales x P/V ratio

20
= 1,20,000 x
100

= 24,000
(iii) Profit when sales are Rs. 1,00,000
Profit = Contribution – Fixed cost
= 20,000 – 15,000 = 5,000
Contribution = Sales x P/V ratio
20
= 1,00,000 x = 20,000
100

(iv) Sales to make a profit of Rs. 20,000

Fixed cost + Profit
Sales =
 P/V ratio

15,000 + 20,000
= x 100
20

35,000
= x 100 = 1,75,000
20

8.A company shows the following results for two periods:

Period Sales Total cost

Rs. Rs.
I 20000 19000
II 10000 9600

Calculate:
[A] P/V ratio
[b] BEP
[c] Fixed cost
[d] Profit when sale are Rs. 30000.

Solution:

Sales Profit
I 20000 1000
II 10000 400

[A] P/V ratio = Difference in P&L/Difference in sales x 100

= 600/10000x100 = 6%
[b] BEP = Fixed cost/P/V ratio
[d] Fixed cost = Contribution-profit
Contribution = Sales/V ratio
= 20000x6/100=1.200
Fixed cost = 1.200-1.000 = 200
BEP = 200/6x100
= Rs. 3.333.
[d] Profit when sales are Rs. 30000
Profit = Contribution-fixed cost
 Contribution = sales P/V ratio
= 30000x6/100 = 1.800
Profit = 1.800-200
= 1.600.

---------------------------------------------------------------------------------------------------------------------

9. Sales 4, 00,000
Fixed cost 1, 80,000
Variable cost 2, 50,000
Ascertain how much the value of sales must be increased for the company to break-even
Solution:

¿ cot
×
BEP sales =P 100
ratio
V
1, 80,000
= ×100= 4, 80,000
37.5
contribution
P/v ratio = ×100
sales
1 , 50,000
= ×100=37.5 %
4 ,00,000
Contribution =sales-variable cost
=4, 00,000-2, 50,000
=1, 50,000
Since current sales is Rs.4, 00,000 where as break even sales is 4, 80,000 sales is to be increased
by Rs.80, 000

Decision Making problem

Make or Buy

1. A manufacturing company finds that while cost of making a component part is Rs. 10,
the same is available in the market at Rs. 9 with an assurance of continuous supply. Give
 your suggestion whether to make or buy this part. Give also your views in case the
supplier reduces the price from Rs. 9 to Rs. 8. The cost information is as follows:
Rs.
Materials 3.50
Direct Labour 4.00
Other variable expenses 1.00
Fixed expenses 1.50
--------
10.00
2. A .T.V manufacturer finds that while it cost him 625 each to make a component, the same is
available in the market at Rs. 575 each, with an assurance of continuous supply.
The breakdown of cost of manufacture is as follows:
Material 275
Labour 175
Other variable costs 50
Fixed costs 125
-------
625
a) Should he make or buy the component?
b) What would be your decision if the supplier offers the component at Rs. 485 each?

Sales Mix
3. The fixed cost per month in a factory is Rs. 50,000. The contribution per unit is Rs. 50 for
product A & for B . Which of the following product mixes is most yielding?
a) 800 A & 1000B;
b) 1,500 A only ;
c) 3,000 B only ;
d) 1,200 A& 400 B;
4. Following information has been made available from the cost records of United Automobile
Ltd. Manufacturing spare parts;
Direct materials Per unit
X Rs. 8
Y Rs. 6
Direction of wages
X 24 hours @25ps per hour
Y 16 hours @25ps per hour
Variable overheads 150% of direct wages.
Fixed overheads ( total ) Rs.750
Selling price
X Rs. 25
Y Rs. 20
The directions want to be acquainted with the desirability of adopting any one of the following
alternative sales mixes in the budget for the next period.
a) 250 units of X & 250 units of Y
b) 400 units of Y only
c) 400 units of X & 100 units of Y
d) 150 units of X & 350 units of Y
State which of the alternative sales mixes you would recommend to the management

Present the following information to management:

The marginal product cost & the contribution per unit & the total contribution & profits resulting
from each of the following sales mixes:
Product Per unit Rs.
Direct materials A 10
Direct materials B 9
Direct wages A 3
 Direct wages B 2
Fixed expenses – Rs. 800
(Variable expenses are allotted to products at 100 per cent of the direct wages )
Sale price A Rs. 20
Sale price B Rs. 15
Sales mixes
1. 100 units of product A & 200 of B
2. 150 units of product A & 150 of B
3. 200 units of product A & 100 of B.
Recommend which of the sales mixes should be adopted.

Export Decisions
5. ABC LTD. Ha been operating at 70% capacity & the following particulars related to the
present level activity :
Units 3,500
Direct materials Rs. 10,800
Direct labour Rs. 5,250
Variable overhead (200% of D.L)
Fixed overhead 14,000
Sales 47,250
ABC LTD. Received an export order for 1,000 units of its product at Rs. 10 per unit. The export
order will entail expenditure in the form of special packing at Rs. 0.50 per unit.
Is the export order worth trying?

6. The cost sheet of a product is given as under :

Rs. Rs.
Direct material 10
Direct wages 6
Factory overhead
Fixed 1.00
Variable 1.00 2.00
--------
Administrative expenses 1.50
Selling & distribution overheads;
Fixed 0.50
Variable 1.00 1.50
-------- -------
21.00
--------
The selling price is Rs.24
The above figures are for the output of 50,000 units. The capacity of the firm is 65,000 units. A
foreign customer is desirous of buying 15,000 units at price of Rs.20 per unit. Advice the
manufacturer whether the offer should be accepted. What will be your advice if the order was
from a local merchant?

7. A product ‘ x ’ takes hours to produce on a machine which is used to full capacity. Its selling
price is Rs. 60 & marginal cost Rs. 30. A component ‘z’ used in the production of ‘ x ’ can be
made on the same machine in 2 hours. The marginal cost of producing ‘ z ’ is Rs. 10. It can be
bought at the net price of Rs. 12 from the market. Should the firm make or buy the component?
8.