Page 93 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes
Example: Sales ` 100,000, variable cost ` 25,000/- and fi xed cost ` 20,000 find out the

contribution and profi t.
`
Sales 1,00,000

Variable Cost 50,000
Contribution 50,000
Fixed Cost 20,000
Profi t 30,000

6.2.1 Method of Difference

Under this method, the contribution can be computed through finding the differences in between
Sales and Variable Cost i.e. Contribution = Sales – Variable Cost = ` 1,00,000 – 50,000 = ` 50,000
6.2.2 Method of Coverages

In this method, the contribution is equated with the summation of Fixed cost and Profi t i.e.
Contribution = Fixed Cost + Profi t = ` 20000 + 30000 = ` 50,000.

Figure 6.4

Marginal Costing(MC)

Cost Volume Profit Analysis (CVP)

Break Even Point Analysis (BEP)

6.3 Absorption Costing

Absorption costing technique is also known by other names as “Full costing” or “Traditional

costing”. According to this technique, all costs are recognised or identified with the products

manufactured. Both fixed and variable costs of each product manufactured are taken into account
to ascertain the total cost.

The absorption costing tells as to how much fixed cost is absorbed besides the variable cost by
each product manufactured. According to this technique, while the variable costs are directly

charged to each unit of the goods produced, the fixed costs are distributed to each category of
product manufactured by the same firm. In absorption costing, “Fixed cost” will also be taken

into account in ascertaining the profit on sale.

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