SRI SHARADA INSTITUTE OF INDIAN MANAGEMENT -

RESEARCH
(A unit of Sri Sringeri Sharada Peetham, Sringeri)

Approved by AICTE

Plot No. 7, Phase-II, Institutional Area, Behind the Grand Hotel, Vasant Kunj,

New Delhi – 110070

Tel.: 2612409090 / 91; Fax: 26124092

E-mail: administration@srisim.org; Website: www.srisim.org

FINANCE PROJECT REPORT

“COSTING”

A report submitted in partial fulfillment of the requirements of the two-year

full time Post Graduate Diploma in Management.

SUBMITTED TO:
Submitted by:

Name: R.VIJAYA RAGHAVAN

&

C.PANDIYAN

Roll No: 20090202,20090114

Batch: 2009 – 2011.

MANAGING THROUGH WISDOM

 Acknowledgement

We would like to express our gratitude to all those who gave us the
possibility to complete this project. We want to thank SRI SHARADA

INSTITUTE OF INDIAN MANAGEMENT-RESEARCH , NEW DELHI for giving us

an opportunity to work on this project. This project has given us practical
knowledge on various FINANCIAL activities being performed.

We would like to extend our sincere gratitude to

(Faculty) for providing us with an opportunity to work under them and

giving us valuable suggestions and priceless guidance without which our

project would have been incomplete.

It has been a pleasure and wonderful experience to get the opportunity to

be guided by them.
 MARGINAL COSTING

The Chartered Institute of Management Accountants, London defines the term marginal cost “the
amount at any given volume of output by which aggregates costs are changed if the volume of
output is increased or decreased by one unit.”

Analyzing the above Definition:-

 Analyzing the above definition, we find that with the increase of one unit of production –
may be single article or batch articles, the total cost of production is increased and this
increase in total cost of production from the existing level to the new level is known as
marginal cost.

Marginal Costing:-

 In economics and finance, marginal cost is the change in total cost that arises when the
quantity produced changes by one unit. That is, it is the cost of producing one more unit
of a good. Mathematically, the marginal cost (MC) function is expressed as the first
derivative of the total cost (TC) function with respect to quantity (Q). Note that the
marginal cost may change with volume, and so at each level of production, the marginal
cost is the cost of the next unit produced.

 MC = dTC/ dQ
A Typical Marginal cost Curve:-

Advantages of Marginal Costing

 How much to produce: The level of output which is most profitable for a running
concern can be determined. Therefore, the production capacity can be utilized to the
maximum possible extent.

 What to Produce: The manufacturer of which product should be undertaken can be

decided upon after comparing the profitability results of different products.

 How to Produce :
 A. Method of Manufacturer - which method is adopted for its manufacture

 B. Hand or Machine Labour

 When to Produce : In the period of trade recession , whether the product ion in the
Plant is to be suspended temporarily or permanently closed down , can be decided upon
after carefully examining the marginal cost structure,
  Whether to Produce: The decision whether a particular product should be
manufactured in the factory or brought from outside source can be taken by comparing
the price at which it can be had from outside and the marginal cost of producing that
article in the factory.

 At What cost to produce: Efficiency & Economy of Plants, No Profit No Loss

Point, Lease or Ownership of Plant, Cost Control, Inventory Valuation etc?

Limitation of Marginal Costing:-

 Classification into fixed and variable elements – a difficult task.

 Faulty Decision

 Difficult Application

 Under or Over Recovery of overheads

 Better Technique available – the systems of budgetary control and standard costing serve
the purpose better than marginal costing.

BREAK EVEN ANALYSIS:-

 Break Even Analysis is a widely used technique to study cost volume profit relationship.
The narrower interpretation of the term break even analysis refers to a system of
determination of that level of activity where total cost equals total selling price.

 The broader interpretation refers to that system of analysis which determines probable
profit at any level of activity. It portrays the relationship between cost of production,
volume of Production and sales value.
BREAK EVEN POINT CURVE:-

ADVANTAGES OF BREAKEVEN ANALYSIS:-

Advantages

 Provides detailed & clearly understandable information.

 Profitability of Products & business can be known.

 Effect of changes of cost & sale prices can be demonstrated.

 Cost control can be exercised.

 Economy & Efficiency can be affected.

LIMITATIONS OF BREAK EVEN ANALSIS:-
Limitations:-

 Based on False Assumptions

Fixed costs do not always remain constant

Variable costs do not always vary proportionately.

Sales revenue does not always change proportionately.

Stock changes affect incomes and condition of growth not assumed.

 Limited Information

 No Necessity: Simple tabulation sufficient, Conclusive guidance not provided,

Difficult to Understand, No basis for comparative efficiency.

BREAK EVEN POINT:-

 The points which breaks the total cost and the selling price evenly to show the level
of output or sales at which there shall be neither profit nor loss, is regarded as
breakeven point. At this point, the revenue of the business exactly equals its cost.

 Breakeven point (of output) = Fixed Cost / Contribution Per

Unit

 Breakeven point (of Sales) = Fixed Cost * Selling Price Per

Unit / Contribution Per Unit

 or BEP(Of Sales) = Break Even Point (of output) * Selling

price per unit
SOME FORMULAES USED IN MARGINAL COSTING:-

 Marginal Cost = Direct Material + Direct Labour +Direct

Expenses(variable) + Variable Overheads

 Marginal Cost = Total Cost – Fixed Cost = Total Variable Cost

 Contribution = Selling Price - Variable Cost

 Contribution = Fixed Cost + Profit

 Profit/Volume Ratio (P/V Ratio) = Total Contribution / Total Sales *100

 P/V Ratio = Change in Contribution / Change in Sales * 100

 P/V Ratio = Change in Profit / Change in Sales * 100

 BEP (OF SALES) = Fixed cost / PV Ratio

 BEP (OF SALES) = Fixed Costs / Total Contribution *Total Sales

 BEP (OF SALES) = Fixed Costs/1- Variable Cost per unit /Selling Price per
unit

 At Breakeven point the desired profit is zero, in case the volumes of output or sales
is to be computed for a ‘desired profit’ , the amount of desired Profit should be
added to Fixed Cost in the formulae given below :

Output (Units) for a desired Profit = Fixed Cost + Desired Profit

/ Contribution per Unit.

Sales for a desired Profit = Fixed Cost + Desired Profit /

Profit Volume Ratio

 Margin of Safety = Total Sales - Sales at Break Even Point

 Margin of Safety (as a %) = Margin of Safety /Total Sales *100

Other Costs Definition:-

 Fixed costs :-Are costs which do not vary with output, for example, rent. In the long
run all costs can be considered variable.

 Variable cost: - Also known as, operating costs, prime costs, on costs and direct
costs are costs which vary directly with the level of output, for example, labour, fuel,
power and cost of raw material.

 Social costs of production: - Are costs incurred by society, as a whole, resulting from
private production.

 Average total cost: - Is the total cost divided by the quantity of output.

 Average fixed cost: - Is the fixed cost divided by the quantity of output.

 Average variable cost: - Are variable costs divided by the quantity of output.

COST FUNCTIONS:-

 Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC)

 FC = 420 VC = 60Q + Q2 TC = 420 + 60Q + Q2

 Marginal Costs (MC) = dTC/dQ

 MC = 60 +2Q

 Average Total Cost (ATC) = Total Cost/Q

 ATC = (420 + 60Q + Q2)/Q ATC = 420/Q + 60 + Q

 Average Fixed Cost (AFC) = FC/Q

 AFC = 420/Q

 Average Variable Costs = VC/Q

 AVC = (60Q + Q2)/Q AVC = 60 + Q.

Element of cost& cost sheet:-

• For proper control & managerial decision like sales price, profit margin,
management is to provide with necessary data to analyses & classifies cost. For this
purpose, the total cost is analyses by elements of cost like material cost, labour cost
& other expenses. These elements of cost are further analyzed into different element
like prime cost, work cost or factory cost, cost of production, total cost.

ADVANTAGES OF COST SHEET:-

 It shows the total cost & cost per units produced during the given period.

 Management to keep a close watch & control over the cost of production.

 It helps in fixing up the selling price more accurately.

 It helps the businessman to submit quotations with reasonable price against tender
for supply of goods.
 Performa of cost sheet:-

PARTICULAR TOTAL COST

Rs.

• RAW MATERIAL CONSUMED

opening stock of row material ……….....

+ purchase of row material …………..

+ purchase related expenses …………..

- Closing stock of row material …………..

- Sales of row material scrap ……….....

COST OF MATERIAL USED --------------

+Direct wages ………….

+ opening stock of working in progress …………..

- Closing stock of working in progress …………..

PRIME COST --------

+ factory overhead …………..

depreciation on factory …………..

insurance of factory …………..

factory chief engineer salary …………..

Sundry factory expenses …………….

Electricity expense …………….

 WORK COST OR FACTORY COST ----------------

+ office overhead

depreciation on office building ……………

depreciation on office cars ……………

insurance on office building ……………

office salary ……………

postage telegram …………….

printing & stationary ……………

office electricity bill …………….

COST OF PRODUCTION ----------------

+ opening stock of finish goods …………….

- closing stock of finish goods …………….

COST OF PRODUCTION OF GOODS SOLD ----------------

+ selling & distribution expenses

sales manager salary …………….

finished goods warehouse expense …………….

advertising expenses …………….

sales promotion expense …………….

delivery van expense …………….

 TOTAL COST ---------

+ Profit …………….

sales …………….

These items are not included in cost sheet

 Provision on tax

 Transfer to general reserve

 Dividend

 Rent receivable

 Profit or loss on sales of investment

 Share transfer fee

 Fine & penalty

 Interest on debenture
 Preliminary expenses

 Underwriting commission

 Discount on issue of shares & debentures