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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
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MARGINALCOSTING
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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.
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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”.
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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.
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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.
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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
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BREAK EVEN CHART
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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:-
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Materials 3. 00
Direct Labor 2. 00
Other VariableExpenses. -1. 00
Depriciation AndOther Fixed Expenses.
2. 00
Total . 8. 00
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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.
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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.
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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.
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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
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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
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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
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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
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Which of the following
equations represents
the balance sheet
Assets + Liabilities =
Shareholders' equity
Assets - Liabilities =
Shareholders' equity
Assets = Liabilities -
Shareholders' Equity
Assets = Liabilities +
Shareholders' equity
A revenue
Is a decrease in
shareholders' equity
Is a decrease or an
increase in
shareholders' equity.
has no impact on
shareholders' equity
Is an increase in
shareholders' equity
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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Thank You
Please forward your query