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    Contribution Analysis and Marginal Costing

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    ADITI BISWAS
    The document discusses contribution analysis and marginal costing. Contribution is defined as the difference between sales and variable costs. It represents the amount available to cover fixed costs and profit. Marginal costing focuses only on variable costs for decision making and treats fixed costs separately. It outlines the key aspects of contribution analysis and marginal costing including calculating contribution, the importance of contribution, what costs are considered marginal costs, and the format of a marginal costing statement. An example problem demonstrates how to use marginal costing to determine if additional units should be produced.

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    Contribution Analysis and Marginal Costing

    Uploaded by

    ADITI BISWAS
    35 views15 pages
    The document discusses contribution analysis and marginal costing. Contribution is defined as the difference between sales and variable costs. It represents the amount available to cover fixed costs and profit. Marginal costing focuses only on variable costs for decision making and treats fixed costs separately. It outlines the key aspects of contribution analysis and marginal costing including calculating contribution, the importance of contribution, what costs are considered marginal costs, and the format of a marginal costing statement. An example problem demonstrates how to use marginal costing to determine if additional units should be produced.

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    Contribution analysis and marginal costing

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    The document discusses contribution analysis and marginal costing. Contribution is defined as the difference between sales and variable costs. It represents the amount available to cover fixed costs and profit. Marginal costing focuses only on variable costs for decision making and treats fixed costs separately. It outlines the key aspects of contribution analysis and marginal costing including calculating contribution, the importance of contribution, what costs are considered marginal costs, and the format of a marginal costing statement. An example problem demonstrates how to use marginal costing to determine if additional units should be produced.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    35 views15 pages

    Contribution Analysis and Marginal Costing

    Uploaded by

    ADITI BISWAS
    The document discusses contribution analysis and marginal costing. Contribution is defined as the difference between sales and variable costs. It represents the amount available to cover fixed costs and profit. Marginal costing focuses only on variable costs for decision making and treats fixed costs separately. It outlines the key aspects of contribution analysis and marginal costing including calculating contribution, the importance of contribution, what costs are considered marginal costs, and the format of a marginal costing statement. An example problem demonstrates how to use marginal costing to determine if additional units should be produced.

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    Contribution analysis and marginal

    costing

    presented by : Ankan mishra


    Ravi kumar
    prasad
    CONTENTS

     Contribution analysis
     Importance of contribution
     Marginal costing
     Marginal cost include
     Format for marginal costing statement
     Calculation for marginal costing statement
    Contribution analysis
    • Contribution is the difference between sales and variable cost or
    marginal cost of sales. It may also be defined as the excess of
    selling price over variable cost per unit.
    • Contribution also known as contribution margin or gross margin.
    • Contribution being the excess of sales over variable cost is the
    amount that is contributed towards fixed expenses and profit.
    Contribution can be
    represent as:

    CONTRIBUTION=SALES-VARIABLE(MARGINAL)
    COST

    CONTRIBUTION=FIXED COST+PROFIT(-LOSS)
    For EXAMPLE:

    • If the selling price of a product is Rs.20/-per unit and its variable cost is Rs.15/-per
    unit, contribution per unit is Rs.5/-(contribution=sales-variable cost)
    • let us say that the fixed cost is 50,000 and the total unit sold is 8,000. This mean that
    total contribution is 8000 x 5 or Rs.40,000 which is not sufficient even to meet the
    fixed cost and the result is a loss of Rs.10000(50,000-40,000)
    • In case, the output is 15,000 units , then the total contribution is 5 x 15,000=Rs.75000
    while the fixed cost remain 50,000, thus making a profit of 25,000.
    (contribution=fixed cost + profit (-loss)
    Importance of contribution:

    • It helps in understanding contribution of individual business lines


    or different products.
    • It is done to understand the strong and weak point of the business
    or the products.
    • It is easy to use and help in calculating break even point of the
    business.
    Marginal costing
    • Marginal costing is a method of cost accounting and decision-making
    used for internal reporting in which only variables costs are charged to
    units of cost and fixed costs are treated as lump sum .It is also known as
    direct, variables, and contribution costing.
    • In marginal costing, only variables costs are used to make decisions. It
    does not consider fixed costs.
    Marginal costs include:

    • The costs actually incurred when you manufacture a


    product
    • The costs that disappear when you shut down a product
    line
    • The costs that disappear when you shut down an entire
    subsidiary
    Marginal cost

    In this technique, Marginal costing is not a method of costing like


    process costing or job costing. Rather it is simply a way to analyze cost
    data for the guidance of management, usually for the purpose of
    understanding the effect of profit changes due to the change in the
    volume of output.
    The term marginal cost implies the additional cost involved in
    producing an extra unit of output.
    For Example:
    • Direct cost per unit Rs 2
    • Direct labour per unit Rs 3
    • Variables overheads Rs 3
    • Fixed cost Rs 5000
    • If 500 unit are produce in particular month, the cost of production will be
    [500xRs (2+3+3)+5000=9000.if 501 unit is produce, the cost of production
    will be[501xRs(2+3+3)+5000=9008. The change in the aggregate cost by Rs
    8 represent marginal cost.
    Format for marginal costing statement:
    Product-types A B C Total

    Sales revenue x x x x

    Less: Variables cost x x x x

    Contribution x x x x

    Less: Total fixed x


    costs
    Total profit x
    Problem 1
    • A company which has a capacity to produce 20000 units is producing at a cost
    of Rs 20 per unit while utilizing 50% of the capacity. 40% of the total cost in
    this connection is fixed,60% variables cost.
    if there is an offer to buy 8000 additional units at Rs 18, can this be accepted?
    Solution
    Variables cost per unit: 60% of Rs 20=12
    50% capacity: 10000
    Therefore, the company can produce 10000 additional units without incurring
    additional fixed cost.
    Contribution per unit when the price is offered Rs 18 : Rs
    Price offered 18
    Less: Variable cost 12
    Contribution per unit 6
    Acceptance of the offer will increase the total contribution towards fixed cost and total
    profit by Rs.(8000x6) or 48000. It is therefore advisable to accept the offer.

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