TABLE OF

CONTENTS
S.no

Topic

Introduction

Meaning of SWOT

Origin of S.W.O.T. Analysis

SWOT Analysis Framework

Overview Matrix

Aim of a SWOT Analysis

Simple Rules

How to do a SWOT ?

SWOT with an Objective

10

Generating Strategies

11

Strengths and Weaknesses

12

Opportunities and Threats

13

Example.1

14

Example.2
Bibliography

Page no

Marginal costing - definition

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.
Marginal costing distinguishes between fixed costs and variable costs as
conventionally classified. Variable costing is another name of marginal costing.
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.

MARGINAL COST
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 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
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.
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
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.

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 = $ 45 = $2.25
Additional units
20

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.
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 actuals 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.

ABSORPTION COSTING
Absorption costing means that all of the manufacturing costs are absorbed by the
units produced. In other words, the cost of a finished unit in inventory will include
direct materials, direct labor, and both variable and fixed manufacturing overhead. As
a result, absorption costing is also referred to as full costing or the full absorption
method.
According to this method, the cost of a product is determined after considering both
fixed and variable costs. The variable costs, such as those of direct materials, direct
labour, etc. are directly charged to the products, while the fixed costs are apportioned

on a suitable basis over different products manufactured during a period. Thus, in case
of Absorption Costing all costs are identified with the manufactured products.

Marginal Costing versus Absorption

Costing
The net profits in Marginal Costing and Absorption Costing are not same because of
the following reasons:
1. Over and Under Absorbed Overheads
In absorption costing, fixed overheads can never be absorbed exactly because of
difficulty in forecasting costs and volume of output. If these balances of under or over
absorbed/recovery are not written off to costing profit and loss account, the actual
amount incurred is not shown in it. In marginal costing, however, the actual fixed
overhead incurred is wholly charged against contribution and hence, there will be
some difference in net profits.
2. Difference in Stock Valuation
In marginal costing, work in progress and finished stocks are valued at marginal
cost, but in absorption costing, they are valued at total production cost. Hence, profit
will differ as different amounts of fixed overheads are considered in two accounts.
The profit difference due to difference in stock valuation is summarized as follows:

When there is no opening and closing stocks, there will be no difference in

profit.
When opening and closing stocks are same, there will be no difference in
profit, provided the fixed cost element in opening and closing stocks are of
the same amount.
When closing stock is more than opening stock, the profit under absorption
costing will be higher as comparatively a greater portion of fixed cost is
included in closing stock and carried over to next period.
When closing stock is less than opening stock, the profit under absorption
costing will be less as comparatively a higher amount of fixed cost contained
in opening stock is debited during the current period.

The features which distinguish marginal costing from absorption

costing are as follows.

In absorption costing, items of stock are costed to include a fair

share of fixed production overhead, whereas in marginal costing, stocks are
valued at variable production cost only. The value of closing stock will be higher
in absorption costing than in marginal costing.

As a consequence of carrying forward an element of fixed production

overheads in closing stock values, the cost of sales used to determine profit in
absorption costing will:

include some fixed production overhead costs incurred in a previous

period but carried forward into opening stock values of the current
period;
exclude some fixed production overhead costs incurred in the current
period by including them in closing stock values.

In contrast marginal costing charges the actual fixed costs of a period in

full into the profit and loss account of the period. (Marginal costing is
therefore sometimes known as period costing.)
In absorption costing, actual fully absorbed unit costs are reduced by
producing in greater quantities, whereas in marginal costing, unit variable
costs are unaffected by the volume of production (that is, provided that
variable costs per unit remain unaltered at the changed level of production
activity). Profit per unit in any period can be affected by the actual volume of
production in absorption costing; this is not the case in marginal costing.
In marginal costing, the identification of variable costs and of contribution
enables management to use cost information more easily for decision-making
purposes (such as in budget decision making). It is easy to decide by how
much contribution (and therefore profit) will be affected by changes in sales
volume. (Profit would be unaffected by changes in production volume). In
absorption costing, however, the effect on profit in a period of changes in
both:
i. production volume;
ii. sales volume;
is not easily seen, because behaviour is not analysed and incremental costs are
not used in the calculation of actual profit.

Arguments in favour of marginal costing

(a) It is simple to operate.
(b) There are no apportionments, which are frequently done on an arbitrary basis, of
fixed costs. Many costs, such as the marketing director's salary, are indivisible by
nature.
(c) Fixed costs will be the same regardless of the volume of output, because they are
period costs. It makes sense, therefore, to charge them in full as a cost to the period.
(d) The cost to produce an extra unit is the variable production cost. It is realistic to
value closing inventory items at this directly attributable cost.
(e) Under or over absorption of overheads is avoided.
(f) Marginal costing provides the best information for decision making.
(g) Fixed costs (such as depreciation, rent and salaries) relate to a period of time and
should be charged against the revenues of the period in which they are incurred.

(h) Absorption costing may encourage over-production since reported profits can be
increased by increasing inventory levels.

Arguments in favour of absorption costing

(a) Fixed production costs are incurred in order to make output; it is therefore 'fair' to
charge all output with a share of these costs.
(b) Closing inventory values, include a share of fixed production overhead, and
therefore follow the requirements of the international accounting standard on
inventory valuation.
(c) Absorption costing is consistent with the accruals concept as a proportion of the
costs of production are carried forward to be matched against future sales.
(d) A problem with calculating the contribution of various products made by an
enterprise is that it may not be clear whether the contribution earned by each product
is enough to cover fixed costs, whereas by charging fixed overhead to a product it is
possible to ascertain whether it is profitable or not. This is particularly important
where fixed production overheads are a large proportion of total production costs. Not
absorbing production would mean that a large portion of expenditure is not accounted
for in unit costs.
(e) In a job or batch costing environment (see section 5 below), absorption costing is
particularly useful in the pricing decision to ensure that the profit markup is sufficient
to cover fixed costs.

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.
2. Businesses today frequently voice their disapproval of the traditional cost
accounting approaches. At the beginning of the 1990s, 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.
3. To assess the present-day value of Marginal Costing, the changes occurring in the
business world must be analyzed more closely.
First, cost planning takes precedence over cost control. The effort involved in
planning and monitoring costs is increasingly being seen as excessive.
Second, 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.
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.
Long-term cost planning based on the idea of lifecycle costing is gaining 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 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 lifecycle pricing policy. This shift in cost and revenue planning is moving
cost and revenue accounting in the direction of investment-related calculations.
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.
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.

THE BASIC DECISION MAKING

INDICATORS IN MARGINAL COSTING

PROFIT VOLUME RATIO

BREAK- EVEN POINT

CASH VOLUME PROFIT ANALYSIS

MARGIN OF SAFETY

SHUT DOWN POINT

1. 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. (where a firm produces a number of products)

Use of PV Ratio

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 PV Ratio.
To determine the Break Even Point and the level of output required to earn a
desired profit.
To decide the most profitable sales mix.

2. 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 point or a business situation at which there is
neither a profit nor a loss to the firm. In other words, at this point, the total
contribution equals fixed 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.

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. It depicts
the following:
(1)Profitability of the firm at different levels of output.
(2)Break-even point No profit no loss situation.
(3)Angle of Incidence: This is the angle at which the total sales line cuts
the total cost line. It is shows as angle (theta). If the angle is large, the
firm is said to make profits at a high rate and vice versa.(4)Relationship
between variable cost, fixed expenses and the contribution.(5)Margin of
safety representing the difference between the total sales and the sales at
breakeven point.

3. 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.

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, is used 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.

USES OF CVP ANALYSIS

a) Budget planning. The volume of sales required to make a profit (breakeven point)
and the 'safety margin' for profits in the budget can be measured.
b) Pricing and sales volume decisions.
c) Sales mix decisions, to determine in what proportions each product should be sold.
d) Decisions that will affect the cost structure and production capacity of the company

4. Margin of Safety
Margin of Safety (MOS) represents the difference between the actual total sales and
sales at break-even point. It can be expressed as a percentage of total sales, or in
value, or in terms of quantity.

SIGNIFICANCE

Upto Break even point the contribution earned is sufficient only to recover
fixed costs. However beyond the Break even point. The contribution is called
profit (since fixed costs are fully recovered by then)
Profit is nothing but contribution carried out of Margin of Safety Sales.
The size of the margin of safety shows the strength of the business.
If the margin of safety is small, it may indicate that the firm has large fixed
expenses and is more vulnerable to changes in sales.
If the margin of safety is large, a slight fall in sales may not affect the business
very much but if it is small even a slight fall in sales may adversely affect the
business.

5. SHUT DOWN POINT

Shut Down Point indicates the level of operations (sales), below which it is not
justifiable to pursue production. For this purpose fixed costs of a business are
classified into
(a) Avoidable or Discretionary Fixed Costs and
(b) Unavoidable or Committed Fixed Costs.
A firm has to close down if its contribution is insufficient to recover the avoidable
fixed costs.The focus of shutdown point 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
expenses incurred when plant is shut down.

KEY FACTOR:

Key factor or Limiting factor represents a resource whose availability is less

than its requirement.
It is a factor, which at a particular time or over a period limits the activities of
a firm.
It is also called Critical Factor (Since it is vital or critical to the firms success)
and Budget Factor (since budgets are formulated by reference to such
limitations or restraints).
Some examples of key Factor are
(a) Shortage of raw material;
(b) Labour shortage;
(c) Plant capacity;
(d) Sales Expectancy;
(e) Cash availability etc.