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. (Variable + Fixed Cost).

Fixed Cost + Profit = Sales – Variable Cost.

The above equation termed as Marginal Costing equation.

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 has to be paid irrespective of whether or not production is taking place. Ex: Salaries, Audit fees, go down rent etc.,

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.

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 are 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, gives the variable costs per unit. If the number of units at a given level of output are 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 be expressed in P.U. terms, contribution is usually expressed in P.U. terms.

Contribution = Sales –Variable Cost

Contribution P.U. = Selling Price P.U.= Selling Price P.U. – Variable Cost P.U.

Total contribution = Contribution P.U. X No. of Units.

“ “ Total Sales – Total Variable Cost.

P/v Ratio: P/v Ratio stands for Profit /Volume Ratio. However, it is ratio of contribution to sales. (The term Profit is used as fixed costs are not considered in Marginal Costing technique & profit is same as Contribution).

= P/v Ratio = Contribution / Sales; Sales-Variable Costs/ Sales;

1-V.C/Sales; Change in Profit(Contribution)/Change in Sales;

BEP ( Break – Even Point ):

BEP= Fixed Cost / P/V Ratio;

In Units : Fixed Cost / Contribution P.U;

Fixed costs / Selling Price P.U. – Variable Cost P.U;

BEP (Sales in Volume) BEP in Units X Selling Price P.U

= Fixed Cost X Total Sales / Total Sales – Total Variable Cost.

Units for Desired Profit = Fixed Cost + Desired Profit/ Contribution P.U.

Sales for Desired Profit = Fixed Cost / Desired Profit / P/v Ratio.

Margin of Safety (MOS) = Total Sales – BEP Sales

Example:

Sales Rs.50, 000; Fixed Cost Rs.1, 00,000; Profit Rs.1, 50,000;

Find out the following (i) P/V Ratio (iii) BEP (iv) MOS

Sol: P/V Ratio = Contribution / Sales

Contribution = Sales – Variable Cost; Fixed Cost + Profit / Sales

Sales = Rs.50, 000, Profit = Rs.1, 50, 000

1, 00, 000 + 1, 50, 000 / 5, 00, 000

= 0.5 or 50%.

I.e. P/v Ratio = 0.5 or 50%;

BEP = Fixed Cost / P/V Ratio

Fixed Cost = Rs.1, 00, 000; P/V Ratio = 0.5 or 50%;

BEP = 1, 00, 000 / 50%

= 2, 00, 000

Margin of Safety (MOS) = Total Sales – Break – Even Sales

.5, 00, 000 – 2, 00, 000 = 3, 00, 000.