Page 115 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 6.10 Summary

Marginal costing is one of the important tools of management not only to take decision, but
also to fix an appropriate price and to assess the level of profi tability.

Marginal cost is nothing, but a change occurred in the total cost due to small change in the
quantity produced.
Absorption costing technique is also known by other names as “Full costing” or “Traditional
costing”.

The cost-volume-profit analysis is a tool to show the relationship between various
ingredients of profi t planning.
The ratio or percentage of contribution margin to sales is known as P/V ratio.

The crucial step in this analysis is the determination of break-even point.

BEP is defined as the sales level at which the total revenue equals total cost.
Margin of safety is the difference between the actual sales and sales at break-even point.
Sales beyond break-even volume brings in profi ts.

6.11 Keywords

BEP (Units): It is the level of units at which the firm neither incurs a loss nor earns profi t.

BEP (Volume): It is the level of sales in Rupees at which the firm neither incurs a loss nor earns
profi t.
Contribution: It is an amount of balance available after the deduction of variable cost from the
sales.
Fixed Cost: It is a cost which is fixed or remains the same for irrespective level of production.

Marginal Cost: Change occurred in the cost of operations due to change in the level of
production.
PV Ratio: Profit volume ration which is nothing but the ratio in between the contribution and

sales.
Variable Cost: It varies along with the level of production.

6.12 Review Questions

1. SV Ltd. a multi-product company, furnishes you the following data relating to the year
2000:

Particulars First half of the year Second half of the year
Sales ` 45,000 ` 50,000
Total cost ` 40,000 ` 43,000

Assuming that there is no change in prices and variable costs that the fi xed expenses are
incurred equally in the two half year periods calculate for the year 1979.
Calculate:
(a) PV ration

(b) Fixed expenses

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