Marginal Costing Formulas
Marginal Costing Equation: We know that profit is difference between sales &
total cost. Total can bifurcated in to Fixed & Variable costs. Thus,
Profit = Sales – Total Cost Where Total
cost= Variable Cost + Fixed Cost
The above
formula can also be written as:
Profit = Sales – Variable Cost - Fixed Cost
Or
Fixed Cost + Profit = Sales – Variable
Cost.
Profit per unit = Selling Price –
Variable Cost per unit - Fixed Cost per unit
Fixed
Cost: F.C, as the name suggests, remain
fixed in amount. The amount spent towards such an expensive remains the same
irrespective of the Volume of production. They may have to be incurred even if
there is no production. For ex: rent of factory building, Salaries, Audit fees,
go down rent etc.
Fixed cost = Sales – Variable Cost – Profit (Loss); or
Fixed cost = (Sales*PV Ratio) – Profit (Loss).
Variable
Cost: Variable cost varies in direct
proportion to the volume of production. No variable costs are included if
production is stopped. As production increases, variable costs increase.
However, Variable cost P.U will not change. For Ex: if it is estimated that 2
units are required to produce 1 unit of finished product, then material cost
will continue to increase as the number of units finished stock desired
increases. All direct costs are Variable cost. Commission to sales persons, certain
taxes, etc.
Variable cost = Sales – Fixed Cost – Profit (Loss); or
Variable Cost = Sales*Variable cost ratio where Variable cost ratio = 1 –
PV Ratio.
Semi
-Variable Cost: S.V.C change with the changes in out put
of production, but the change not proportionate. For the purpose of analysis,
S.V.C is split in to Fixed Cost and Variable Cost. S.V.C normally has a fixed
cost component, which needs to be incurred irrespective of no. of units
produced. Telephone expenses are a example of S.V.C. Telephone exp. Can be
split in to a fixed component of a rent that needs to be paid whether or not
the telephone is used. The charge for every call made constitutes the variable
component.
Two point
Method: Under this method, the out put at
two different levels is compared with corresponding amount of semi variable
expenses. Since fixed costs, the change in amount of expenses is on account of
variable costs, divided by the change in out put, and gives the variable costs
per unit. If the number of units at a given level of output is multiplied with
variable cost per unit, we get the variable proportion in the total amount of expenses
at the given level. The difference between the two amounts gives us the ‘Fixed
Cost’ component in the semi – variable cost.
Contribution: Contribution is the difference between sales and Variable Costs. Since sales & Variable Cost can be both expressed in P.U. terms, contribution is usually expressed in P.U. terms.
Contribution = Sales –Variable Cost, or
Contribution per unit = Selling Price per
unit – Variable Cost per unit, or
Total contribution = Contribution P.U. X
No. of Units sold.
P/v Ratio: P/v Ratio stands for Profit /Volume Ratio. However,
it is ratio of contribution to sales. It is calculated by applying the
following formula:
P/v
Ratio = (Contribution / Sales)*100, or
P/v Ratio = (Sales-Variable Costs)/
Sales*100; or
P/v Ratio = 1 - Variable cost ratio
(Variable Cost Ratio is the % of variable cost to sales), or
P/v Ratio = {Change in Profit (contribution)/Change
in Sales} * 100.
BEP (Break
– Even Point):
BEP (In Rs.) = Fixed Cost / P/V Ratio;
or
BEP (In Units) = Fixed Cost /
Contribution PER UNIT; or Fixed costs / (Selling Price PER UNIT. – Variable
Cost PER UNIT);
BEP (In Rs.) = BEP in Units X Selling
Price PER UNIT; or
BEP (In Rs.) = (Fixed Cost X Total Sales)*
Contribution.
Desired sales or Desired Profit:
Units to be sold to earn Desired Profit
= (Fixed Cost + Desired Profit)/ Contribution PER UNIT.
Desired Sales to earn Desired Profit = (Fixed
Cost / Desired Profit) / P/v Ratio.
Margin of Safety (MOS):
MOS (In Rs.)= Total Sales – BEP Sales;
or
MOS (In Rs.) =Profit/ PV ratio; or
MOS (In Units) =
Profit / Contribution per unit.