Amity School of Business

Amity School of Business

BBA, II SEMESTER
MODULE IV

1
 MARGINAL Amity School of Business

COSTING
• Also known as variable costing or direct
costing
• Under this technique, only variable costs
are charged as product cost and included
in inventory. Fixed manufacturing costs
are not allotted to products but are
considered as period costs and thus
charged directly to Profit and loss Account
of the year.
2
 Marginal Cost Amity School of Business

• Its same as variable cost

• Marginal cost is the additional cost of
producing an additional unit of product.
• CIMA defined marginal cost as the amount
at any given volume of output by which
aggregate costs are changed, if volume of
output is increased or decreased by one
unit.

3
 Amity School of Business

• Variable costing is defined by CIMA as

The accounting system in which variable
costs are charged to cost units and fixed
costs of the period are written off in full
against the aggregate contribution. Its
special value is in decision making.

4
 Characteristics Amity School of Business

of Variable Costing
• Segregation of costs into fixed and
variable elements
• Only variable costs are charged to
products produced during the period.
• Fixed costs are treated as period costs
and are charged to Costing Profit and
Loss Account.

5
 Amity School of Business

• The work in progress and finished stocks

are valued at variable costs only.
• Contribution: Contribution is the difference
between sales value and variable cost of
sales. The relative profitability of products
or departments is based on a study of
‘contribution’ made by each of the
products or departments.

6
 Amity School of Business

• In marginal costing, profit is calculated by

two stage approach.
• First of all, contribution is determined for
each product or department. The
contributions of various products or
departments are pooled together.
• Then from this pooled contribution, total
fixed cost is deducted to arrive at profit or
loss.
7
 Advantages Amity School of Business

i. Help in managerial decisions

ii. Cost control
iii. Simple technique
iv. No under or over absorption of
overheads
v. Constant costs per unit
vi. Realistic valuation of stocks
vii. Aid to profit planning
8
 Amity School of Business

COST VOLUME PROFIT

ANALYSIS
• Cost of production
• Volume of sales
• Profit
• These are inter related
• The cost of a product determines its
selling price and selling price determines
the level of profit.
9
 Amity School of Business

• According to CIMA,
CVP analysis is the study of the
effects on future profits of changes
in fixed cost, variable cost, sales
price, quantity and mix.

10
 Break Even Amity School of Business

Analysis
• Break even analysis is widely used
technique to study CVP relationship.
• BEP analysis is concerned with
determining break even point i.e., that
level of production and sales where there
is no profit and no loss.
• It is used to determine probable profit/loss
at any level of production/sales or volume
of sales to earn a desired amount of profit.
11
 Assumptions underlying Amity School of Business

Break Even Analysis

i. All costs can be separated into fixed and
variable components.
ii. Variable cost per unit remains constant
and total variable cost is directly
proportional to volume of production
iii. Total fixed cost remains constant.
iv. Selling price per unit does not change
with volume of sales.

12
 Amity School of Business

v. There is only one product or in case of

multiple product, sales mix remains
unchanged
vi. Volume of production equals volume of
sales.
vii. Productivity per worker does not change
viii.There will be no change in general price
level.

13
 Amity School of Business

• Contribution = Sales – Variable cost

• Contribution = Profit + Fixed Cost
• P/V Ratio = Contribution
Sales
• BEP = Fixed Cost
P/V Ratio

14