Marginal Costing

What is fringy tolling? What be its features? What are the radical assumptions do by Marginal Costing? Marginal Costing is ascertainment of the peripheral court which varies directly with the volume of production by differentiating between frozen salutes and variable appeals and finally ascertaining its effect on sugar. The base assumptions made by marginal costing are following add up variable cost is directly proportion to the level of activity. However, variable cost per unit remains everlasting at all the levels of activities. Per unit inter modify price remains continual at all levels of activities. All the items produced by the organisation are sold off. Features of Marginal costing It is a method of recoding costs and reporting breads. It involves ascertaining marginal costs which is the difference of rooted(p) cost and variable cost. The operating costs are differentiated into stubborn costs and variable costs. Semi variable costs are as well divid ed in the individual components of ameliorate cost and variable cost. refractory costs which remain constant regardless of the volume of production do not find place in the product cost ending and inventory valuation. Fixed costs are treated as breaker point charge and are written off to the profit and hurt composition in the end incurred. Only variable costs are interpreted into conside dimensionn while computing the product cost. Prices of products are based on variable cost only. Marginal parting decides the profitability of the products. What are the limitations of Marginal Costing? The limitations of Marginal Costing The classification of union costs into rooted(p) and variable cost is difficult. In this technique fixed costs are hitly eliminated for the valuation of inventory of finished and semi-finished goods.Such elimination affects the profitability adversely. In marginal costing historical data is used while focusing decisions are related to future event s. It does not provide any(prenominal) measuring for the evaluation of performance. Selling price fixed on the basis of marginal cost pass on be useful only for short period of time. Assessment of profitability on the marginal cost base hindquarters be used only in the short period of time. What is Cost Volume-Profit relationship? Cost Volume-Profit (CVP) relationship is an analysis which studies the relationships between the following factors and its tint on the amount of profits. Selling price per unit and total gross sales amount Total cost which may be in any form i. e. fixed cost or inconstant cost. -Volume of sales In simple words, CVP is a management accounting tool that expresses relationship among total sales, total cost and profit. Cost Volume-Profit relationship is one of the important techniques of cost and management accounting. It is a powerful tool which furnishes the complete picture of the profit structure and helps in planning of profits. It can also an swer what if type of questions by telling the volume required to produce.This concept is relevant in all decision making areas, particularly in the short run. rationalise P/V ratio and Contribution. P/V symmetry P/V Ratio (Profit Volume Ratio) is the ratio of piece to sales which indicates the percentage earned with respect to one rupee of sales. It also measures the rate of change of profit due to change in volume of sales. Its fundamental retention is that if per unit sales price and variable cost are constant then P/V Ratio go forth be constant at all the levels of activities. A change in fixed cost does not affect P/V Ratio. It is calculated as down the stairs Contribution * 100) / Sales (Change in profits * 100) / (Change in sales) A noble P/V Ratio indicates that a slight increase in sales without increase in fixed costs will event in heightser profits. A low P/V ratio which indicates low profitability can be improved by change magnitude selling price, reducing ma rginal costs or selling products having high P/V ratio. Contribution It is the difference between sales gross and variable cost (also cognize as variable cost). Variable cost is the important cost in deciding profitability as fixed costs are ignored by marginal costing. It can be show in two shipway Sales Revenue Variable Cost Fixed Cost + Profit The situation generating higher contribution is treated as a profitable situation. Explain Break in time Point. How does BEP help in making business decision? Break yet Point (BEP) is a volume of sales where there is neither loss nor profit. That means contribution is enough to cover the fixed costs. Thus, we can affirm that Contribution = Fixed Cost Any contribution generated after BEP will directly result into profits as the fixed costs are fully covered now. BEP can be computed in two ways In terms of Quantity- Fixed Costs / Contribution per unitIn terms of Amount- (Fixed Costs) / (P/V Ratio) BEP (Break horizontal Point) is the situation where there is neither loss nor profit. At this stage, the contribution is enough to cover the fixed costs i. e contribution is mate to fixed cost. Contribution generated after the break even point will result in profits for the organisation. Profit maximization is the motive of any organisation. Thus, every organisation use BEP as a base to seduce various decisions in regard to its sales volume and tries to increase it so that total fixed costs can be covered as early as possible and more profits can be earned.Explain Margin of Safety. Margin of Safety is the amount of sales which generates profit. In other words, sales beyond Break Even Point are known as Margin of Safety. It is calculated as the difference between total sales and the break even sales. It can be expressed in monetary terms or number of units. It can be expressed as on a lower floor Margin of Safety = Sales Break Even Sales = Sales (Fixed Cost) / (P/V Ratio) = ((Sales * (P/V) Ratio) Fixed Cost) / ( P/V) Ratio = (Contribution Fixed Cost) / (P/V) Ratio = Profit / (P/V) RatioThe size of margin of safety is an extremely important calculate to the financial strength of a business. If margin of safety is large, which indicates that BEP is much below the actual sales, that means business is in a sound judicial admission and reduction in sales will not affect the profit of the business. On the other hand, if margin of safety is low, any loss of sales may be a serious matter. Thus, efforts need to be made to reduce fixed costs, variable costs or increasing the selling price or sales volume to improve contribution and overall P/V Ratio.