af session 6 mba

8/10/2019 Af Session 6 Mba

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Copyright © Amity University

PAN African eNetwork

Project

Masters of Business Administration (IB)

Accounting and Finance

Semester - I

Dr. N N Sen Gupta



MARGINALCOSTING




Marginal Cost

• According to the Terminology of Cost Accountancy of the Institute ofCost And Management Accountant, London, Marginal Costrepresents “the amount of any volume of given output by whichaggregate cost are changed if the volume of output is increased byone units.

• In practice, it is measured by the total variable costs attributable toone unit.

• For example, the cost of production of 1,000 units of radios is Rs. 2,00, 000 and that of 1001 units is Rs. 2, 00, 150 the marginal cost isRs. 150, i.e., 2, 00, 150 – 2, 00, 000.




Marginal Costing

• The Institute of Cost and Management, London,has defined Marginal costing as “theascertainment of marginal costs and of theeffects on profit of changes in volume or type ofoutput by differentiating between fixed costs andvariable costs”. “In this technique of costing onlyvariable costs are charged to operationalprocess or products, leaving all indirect cost to

be written off against profit in the period in whichthey arise”.




Marginal Costing

• Thus, marginal costing is not a system of

costing such as process costing, job

costing, operating costing, etc. but a

technique which is concerned with thechanges in costs and profits resulting from

changes in the volume of output. Marginal

costing is also known as variable costing.




FEW CHARACTERISTICS OF MARGINAL

COSTINGIt is a technique of analysis and presentation of cost which help

management in making many managerial decision and is no anindependent system of costing such as job costing or process costing.

All elements of cost- production, administration and selling and distributionare classified into variable and fixed components. Even semi-variable costsare analysed into fixed and variable.

The variable cost (marginal costs) are regarded as the cost of the products.

Fixed costs are treated as period costs and are charged to profit and lossaccount for the period for which they are incurred.

The stocks of finished goods and work-in-process are valued at marginalcost only.

Prices are determined on the basis of marginal cost by adding „contribution‟

which is the excess of sales and selling price over marginal cost of sales.



Distinction between marginal and absorption costing

Marginal costing Absorption costing

1. Only variable costs are considered for

product costing and inventory

valuation.

Both fixed and variable costs are

considered for product costing and

inventory valuation.

2. Fixed costs are regarded as period

costs. The Profitability of different

products is judged by their P/V ratio.

Fixed costs are charged to the cost of

production. Each product bears a

reasonable share of fixed cost and thusthe profitability of a product is influenced

by the apportionment of fixed costs.

3. Cost data presented highlight the total

contribution of each product. Cost data are presented in conventional

pattern. Net profit of each product is

determined after subtracting fixed cost

along with their variable costs. 4. The difference in the magnitude of

opening stock and closing stock does

not affect the unit cost of production.

The difference in the magnitude of opening

stock and closing stock affects the unit

cost of production due to the impact of

related fixed cost.


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Profit / Volume Ratio (P/V Ratio or C/S Ratio)

Cost-Volume-Profit analysis is a technique for studying therelationship between cost volume and profit. Profits of anundertaking depends upon a large number of factors. But the

most important of these factors are the cost of manufacture,volume of sales and the selling price of the products. In wordsof Herman C. Heiser,“the most significant single factor in profitplanning of the average business is the relationship betweenvolume of business, cost and profits”. The CVP relationship is

an important tool used for profit planning of a business.

P/V Ratio =Sales

Contribution

Cost Volume Profit Analysis



BREAK EVEN CHART



Numerical 1

• A manufacturing company finds that while the

cost of making a component No. 0.51 in its own

workshop is Rs. 8.00 each, the same is available

in market at Rs. 6.50 with an assurance ofcontinious supply. Give your suggestion whether

to make or buy this component. Give also your

views in case the supplier reduces the price from

Rs. 6.50 to Rs. 5.50. The cost of data follows:-



Materials 3. 00

Direct Labor 2. 00

Other VariableExpenses. -1. 00

Depriciation AndOther Fixed Expenses.

2. 00

Total . 8. 00



NUMERICAL – 2

From the following information calculate the

break-even point in units and in sales value:

Output = 3, 000 units.

Selling Price per unit = Rs. 30.

Variable Cost per unit = Rs. 20.

Total Fixed Cost = Rs. 20, 000.



NUMERICAL - 3

From the following particulars, calculate:i. Break-even point in terms of sales value and in units.

ii. Number of units that must be sold to earn a profit of Rs. 90,000.

Fixed Factory Overhead cost = Rs. 60,000.

Fixed Selling Overhead cost = Rs. 12,000.

Variable Manufacturing Cost per Unit = Rs. 12.

Variable Selling Cost per unit = Rs. 3.

Selling Price per unit = Rs. 24.



Differential cost

• It may be defined as “the increase or decrease in totalcost or the change in specific elements of cost that resultfrom any variation in operations”. It represents anincrease or decrease in total cost resulting out of :

• (a) producing or distributing a few more or few less ofthe products;

• (b) a change in the method of production or ofdistribution;

• (c) an addition or deletion of a product or a territory; and

• (d) selection of an additional sales channel.



The main difference between marginal costing and absorption costing is regarding the treatment of

a. Prime costb. Fixed overheads

c. Direct materials

d. Variable overheads

Multiple Choice Questions



Contribution is defined as

a. Difference between sales revenue and profit b. Difference between sales revenue and fixed costs

c. Difference between sales revenue and variable costs

d. None of the above



When production exceeds sales (in units) then profit under

a. Marginal costing is higher than that of absorption costing b. Marginal costing is lower than that of absorption costing

c. Marginal costing is equal to that of absorption costing

d. None of above



If margin of safety is 45% of sales then what about the remaining 55% of sales

a. Profit b. Break-even sales

c. Fixed cost

d. None of the above



Which of the following

equations represents

the balance sheet

Assets + Liabilities =

Shareholders' equity

Assets - Liabilities =


Assets = Liabilities -

Shareholders' Equity

Assets = Liabilities +


A revenue

Is a decrease in

shareholders' equity

Is a decrease or an

increase in

shareholders' equity.

has no impact on


Is an increase in




What is the ration

between current

assets and current

liabilities called? Return on assets

Return on

Investment Current Ratio Cash ratio

Which of the

following is not

a current

asset?

Accounts

receivable

Inventory of

finished

products

Inventory of raw

materials Land



What is the final

stage of the

accounting

process? Journal

Financial

statement Ledger Trial balance

What is the process

called, where costs

of an intangible

asset are allocatedover its useful life? Depletion Impairment Depreciation Amortization



Which of the

following items is

not a sub-

category of

shareholders'

equity? Share capital Retained earnings Dividends payable Share premium

Which of the

following

equations is

correct?

Share

premium =

Issue price +

Par value

Share premium

= Issue price -

Par value

Share premium

= Issue price /

Par value

Share premium

= Issue price x

Par value



Sale returns

appearing in the

trial balance are

deducted from Capital Sales Purchases

None of the

three

Drawings arededucted from Sales Purchases Expenses Capital

Commission

received in

advance has a Credit balance Debit balance Negative balance

None of the

above



What is the

order in which

the accounting

transactions

and events are

recorded in the

books:

Journal,

subsdiary

books, P/L A/c

and Ledger

Ledger, Journal

Balance sheet,

and Profit and

loss A/c

Journal, ledger,

P/L A/c, and

balance sheet

P/L A/c, ledger

and balance sheet

Bills receivable

is a Current asset Fixed asset Tangible asset Intangible asset

Bank account is

Personal

account

Intangible real

account Nominal account Both (b) and (c)



The Profit and

loss account

shows

The financial

position of the

concern

The degree of

honesty withwhich accounting

work has been

done

The capital

invested in

business

Profit earned or

loss suffered by

the firm

Gross profit is the

differencebetween

Sales andpurchases

Sales and cost ofsales

Sales and totalexpenses

None of thethree

P & L account

is prepared for

a period of one

year byfollowing

Consistencyconcept

Conservatismconcept

Time PeiodConcept Cost Concept



Payments

received inadvance from a

customer for a

contract can be

Shown as a

deduction fromcontract work-in-

progress on asset

side Shown as a liability Shown as an asset Either (a) or (b)

Which of the

following is an

example of

personal

account? Machinery Rent Cash Creditor / Salary

Purchase of goods on

credit from A is

recorded as

Debit purchases a/c;

Credit cash a/c

Debit A a/c; Credit

purchases a/c

Debit purchase a/c;

credit A a/c

Debit Stock a/c;

Credit purchase a/c



When fixed assets

are sold

The total assets

are sold

The total liabilities

will increase

The total assets will

decrease

There is no change

in the total assets

Purchase of

raw materials

for cash

Increase total

assets

Increases total

liabilites

Leaves total

assets unchanged

Increases total

fixed assets

Withdrawal of

goods from stock

by the owner of the

business for

personal use

should be recorded

by debting

Drawings account

and crediting cash

accounting

Drawings account

and crediting

purchases

accounting

Capital account

and crediting

drawings account

Purchases account

and crediting

drawings account



Cost of

production is

equat to

Prime costs +

other

manufacturing

costs

Production

costs

+Administratio

n expenses

Works cost +

Administration

costs + Selling

expenses

None of the

above



Question No. Answer

1 B2 D

3 D

4 D

5 C

6 D

7 B

8 D

9 A

10 D

11 C

12 B

13 B14 D

15 A

16 C

17 C

18 A

19 A

20 D

21 D

22 B

23 C

24 D

25 D

26 C

27 D

28 C

29 B

30 D

Answer Key



Thank You

Please forward your query

To: [email protected]

CC: [email protected]

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af session 6 mba

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