CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.

AGRAWAL

CHAPTER-13
MARGINAL COSTING

TABLE OF CONTENTS:
1. Absorption Costing and Marginal Costing
2. Limitations of Absorption Costing
3. Concept of Marginal Cost
4. Basic Features of Marginal Costing
5. Contribution or P/V Ratio, Break Even and MOS
6. Formulas
7. Practical Problem
8. Past Exam Theory Questions

1. ABSORPTION COSTING AND MARGINAL COSTING

Absorption costing is a costing technique in which all manufacturing costs viz. variable as well as fixed cost are
considered as cost of goods produced. Thus in order to determine the cost of goods manufactured and
valuation of inventories, manufacturing costs, variable as well as fixed costs are fully absorbed.

Marginal cost in cost accounting, means incremental production cost i.e. costs which tend to vary in direct
proportion to the changes in the production level. If an extra unit of output is produced, the cost which is
incurred for producing this unit is regarded as marginal (variable) cost, since fixed cost remains constant.

Marginal costing is not a distinct method of costing like unit costing, job costing, process, costing etc. but it is a
technique used in managerial decision making process, with a view of maximising of profits of an enterprise.

Marginal costing is a technique in which only variable manufacturing costs are considered and used while
valuing inventories and determining cost of goods sold. In other words marginal costing technique considers
only variable manufacturing costs as product cost and are allocated to products manufactured. Fixed
(manufacturing) overheads are not treated as product costs and are not considered in valuing the inventories
and determining the cost of goods sold.
Absorption costing and variable costing differ from each other with regard to -
i) Cost elements included in product costs,
ii) Difference in inventory values,
iii) Difference in net income.
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DIFFERENCE BETWEEN ABSORPTION COSTING AND MARGINAL COSTING:
ABSORPTION COSTING MARGINAL COSTING
Both fixed and variable costs are treated as product Only variable costs are considered as product cost.
cost.
Valuation of stock of inventory includes fixed as well Valuation of stock of inventory is based only on
as variable production overheads. variable cost.
All administrative, selling & distribution costs are All fixed costs (Manufacturing, administrative,
treated as period costs and written off to Profit & Loss selling and distribution costs) are treated as period
account. costs and written off to Profit & Loss Account.
Under/over recovery of fixed overheads generally The question of under/over recovery of fixed
arises. overheads does not arise.
In initial years higher profit is reflected due to In initial years lower profit is reflected due to
inventory valuation on total cost. inventory valuation on variable cost basis.
Managerial decisions are based on total profit. Managerial decisions are based on contribution.

The table given below illustrates different cost treatment under two systems of costing:
TREATMENT OF COST ELEMENTS
Sr.
Element of cost Absorption Costing Marginal costing
No.
1. Direct Material Product Product
2. Direct labour Product Product
3. Direct Expenses Product Product
4. Factory overheads variable
- Variable Product Product
- Fixed Product Period
5. Administration Expenses
- Variable *Period Period
- Fixed *Period Period
6. Selling & Distribution Expenses
- Variable Period Period
- Fixed Period Period
*One may alternatively assume it as product cost.

2. LIMITATIONS OF ABSORPTION COSTING

Under the absorption costing method, total cost is the sum of the cost of direct material, direct labour, direct
expenses, factory overheads. In this cost system, unit cost remain the same, other things being the same only
when level of output remain the same.
Since the factors are continuously fluctuating, the unit cost will vary from one period to another. Thus it is not
possible for the costing department to ascertain the true and correct unit cost.

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3. CONCEPT OF MARGINAL COST

The cost which arises from the production of additional units of output and does not arise in case the
additional units are not produced is known as 'Marginal Cost'.
Definition of Marginal Cost:
"The amount at any given volume of output by which aggregate costs are changed if the volume of output is
increased or decreased by one unit."
CIMA London defines the Marginal costing as -
"The ascertainment of marginal cost and effect on profit of changes in volume or type of output by
differentiating between variable cost and fixed cost".
Marginal cost = Prime cost + Variable factory overheads
or
Marginal cost = Total cost - Fixed cost

4. BASIC FEATURES OF MARGINAL COSTING

1. All costs are classified on variability basis as fixed costs and variable costs.
2. Variable Cost is treated as 'Product Cost' and are charged to operations, processes or products.
3. Fixed Costs are treated as 'Period Costs' and are written off against profit in the period in which they
arise.
4. Prices are based on marginal cost and Contribution.
5. Marginal Costing combine the technique of cost recording and cost reporting.
6. Performance is evaluated in terms of contribution.

5. CONTRIBUTION OR P/V RATIO, BREAK EVEN AND MOS

Contribution is a difference between sales and variable Cost. Contribution is a portion of Sales, which remains
after recovering variable costs and is available towards fixed costs and profit.
Contribution plays an eminent role in marginal costing system, as it is a driving force for managerial decision
making process.
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 SELLING PRICE/UNIT OR TOTAL SALES

Variable Cost / Unit Fixed Cost / Unit

PROFIT
Or Or
Total Variable Cost Total Fixed Cost

CONTRIBUTION
CONTRIBUTION

SALES – VARIABLE COST

FIXED COST +/- PROFIT/(LOSS)

SALES x P/V RATIO

Contribution is expressed in either of the following three ways -

1. Contribution per unit
2. Contribution per Rs. 100 Sales (Profit Volume Ratio i.e. P/V Ratio)
3. Contribution per 1% capacity
Contribution per unit = Selling price per unit - Variable cost per unit
Contribution for selected sales level = Sales - Variable Cost
Contribution per 1% Capacity = Sale value per 1% capacity - Variable Cost per
1% capacity
Change in
Contribution per unit Contribution Pr ofit
P/V Ratio =  100 or =  100 or =  100
Selling Pr ice per unit Sales Change in
Sales
Look at contribution in case of multiple products
Products Total
Particulars
Rs. (PI) Rs. (PII) Rs. (PIII) Rs. (PIV) Rs.
Sales ….C…. ………… ………… ………… ….a…..
Less: Variable Cost ………… ………… ………… ………… …………
Contribution ….d….. ………… ………… ………… ….b…..
Less: Fixed Cost …………
Net Profit ………
d b
Individual PV Ratio =  100 Overall PV Ratio =  100
c a

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Example 1: Contribution - Single Product
Given is the data by X Chemicals Ltd.
Installed annual Capacity 50 tones
Production and sales 30 tones
Selling Price per kg. Rs. 250
Variable Cost per kg. Rs. 150
Annual Fixed Cost Rs. 20,00,000
Find out -
1. Contribution per kg. 2. P/V Ratio
3. Contribution per 1% Capacity 4. Profitability as at present
Understanding the concept:
Contribution per kg = Selling Price per kg. - Variable Cost per kg.
= Rs. 250 - Rs. 150 = Rs. 100 per kg.
Contribution/unit
P/V Ratio =  100
Sales/unit
100
=  100 = 40%
250
Contribution per 1% Capacity
= Sale Value 1% Capacity - Variable cost for 1% Capacity
= [500 kg x Rs. 250] - [500 kgs x Rs. 150]
= 500 kgs [Rs. 250 - Rs. 150] = Rs. 50,000
Profitability as at Present -
Particulars Rs. lakhs
Sales 30,000 kgs x Rs. 250 75
Less: Variable Cost 30,000 kgs x Rs. 150 45
Contribution 30
Less: Fixed Cost 20
 Net Profit 10

Example 2: Contribution - Multi products

Given is the cost data of Y Co. Ltd.
Products manufactured
Particulars
P1 P2 P3
Selling Price per unit (Rs.) 300 100 500
Variable Cost per unit (Rs.) 200 60 350
No. of units produced and sold 10,000 30,000 6,000
Common facilities are used to manufacture the product.
The annual fixed cost is Rs. 25,00,000
Find out the Contribution and net Profit of the company

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 Understanding the concept:
Products
Particulars Total
P1 P2 P3
Units Produced & Sold 10,000 30,000 6,000
Contribution per Unit (Rs.) 100 40 150
Contribution (Rs. lakhs) 10 12 9 31
Less Fixed Cost (Rs. Lakhs) 25
Net Profit 6
Alternatively:
Sales Amount
Product P/V Ratio Calculation
Rs. lakhs Rs. lakhs
P1 30 33 1/3% 30 x 33 1/3% 10
P2 30 40% 30 x 40% 12
P3 30 30% 30 x 30% 9
Total contribution 31
Less: Fixed Cost 25
Net Profit 6
Total Contribution 31
Combined P/V Ratio = =  100 = 34.44%
Total Sales 90
Example 3: Contribution - Profit
Following is the data of X Ltd.
Particulars Year 1 Year 2
Sales (Rs. lakhs) 600 850.00
Net profit (Rs. lakhs) 60 147.50
Find out P/V Ratio, Variable cost as % of sales and fixed cost.

Understanding the concept:

Change in Pr ofit
P/V Ratio =  100
Change is Sales
147.50 − 60 87.50
=  100 =  100 = 35%
850 − 600 250
Variable Cost as % of Sales = 100 - PV Ratio
= 100 - 35
= 65% of sales
or
Particulars Year 1 Year 2
Sales (Rs. lakhs) 600 850.00
Net profit (Rs. lakhs) 60 147.50
Total Cost 540 702.50

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Change in Cost
Variable Cost as % of Sales =  100
Change in Sales
702.50-540
=  100
850 − 600
162.50
=  100 = 65%
250
Assumptions for Calculations.
1. There is no change in Selling Price
2. Total fixed cost remains constant
3. There is no change in efficiency
4. Variable Cost per unit remains the same

What does P/V Ratio indicates?

P/V ratio indicates contribution per Rs. 100 change in sales. It is a contribution with reference to Rs. 100
Sale Value.

What is the use of P/V Ratio?

P/V ratio facilitates to determine -
1. Variable cost for any given sales volume
2. Contribution for any given sales volume
3. Sales volume for any given variable cost.
4. Sales volume required to earn desired profit
5. Break even Point
6. Fixed Cost for any given Break Even Point
7. Fixed Cost for any given Sales Volume and profit
8. Profitability of each product, operation, process etc.
PV Ratio thus facilitates managerial decision making process. We will see the usefulness of P/V ratio in
applications of marginal costing.

How P/V ratio can be improved?

Following are the ways to improve upon the P/V ratio -
1. By reducing variable cost
2. By increasing selling price
3. By reducing variable cost and increasing selling price
4. By improving Sales mix (i.e. increasing the sales of products having higher P/V ratio and reducing
the Sales of products having lower P/V Ratio)

Example 4: P/V Ratio improvement

Given is the data of X Ltd.
No. of units produced and sold - 1 lakh units
Selling Price per Unit (Rs.) 300
Variable Cost per Unit (Rs.) 180
Annual fixed cost - Rs. 100 lakhs
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 Find out P/V Ratio. Also find out new P/V Ratio if
1. Selling Price is increased by 10%
or
2. Variable Cost is decreased by 10%
or
3. Variable Cost is decreased by 5% and selling price is increased by 5%

Understanding the concept:

Contributi on
P/V Ratio =  100
Sales
Existing P/V New PV Ratio Situation
Particulars Ratio (%) 1 2 3
Rs. Rs. Rs. Rs.
Selling Price per unit (X) 300 330 300 315
Less: Variable Cost per Unit 180 180 162 171
Contribution per Unit (Y) 120 150 138 144
P/V Ratio [Y/X  100] 40% 45.45% 46% 45.71%

Conclusion: Increase in selling price as well as decrease in variable cost increase the contribution and
hence P/V ratio is improved. Change in volume of sales or change in fixed cost do not have any effect on
P/V ratio.

Example 5: P/V Ratio - change in sales mix

Given below is the cost data of Excel Ltd.
Product
Particulars X Y
Rs. Rs.
Selling Price Per Unit 200 250
Variable Cost per unit 120 200
Annual sales are to the tune of Rs. 150 lakhs
Sales value mix is in the ratio of 4: 6
Annual fixed cost is Rs. 30 lakhs. Find out combined P/V Ratio and profitability of the company.
If sales value mix ratio is changed to 6: 4, find out new combined P/V ratio and profitability of the
company.

Understanding the concept:

In this problem, we have to calculate combined or overall or composite P/V Ratio of the Company. This is
based on product sales mix.
If company's sales are of Rs. 100
Particulars Rs.

 4 
Sales mix: Product X  
 10  40

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 6  60
Y 
 10 
Total 100

Composite contribution for Rs. 100 Sales

= [40 x 40%] + [60 x 20%]
Product X Product Y
= 16 + 12 = Rs. 28
Composite P/V Ratio is 28%
Profitability Rs. lakhs
Contribution Rs. 150 lakhs x 28% 42
Less Fixed Cost 30
Profit 12
or
Sales P/V Ratio Rs. lakhs
Product X: [40% of Rs. 150] x 40% 24
Y: [60% of Rs. 150] x 20% 18
42
Less: Fixed Cost 30
Profit 12
With the change in sales mix, let us review new p/v ratio and profitability.
Sale Contribution
Sales P/V Ratio
Product Value Rs.
Mix %
Rs. Lakhs Lakhs
X 6/10 90 40% 36
Y 4/10 60 20% 12
150 48
Less: Fixed Cost 30
Net Profit 18
Logic: By in creasing sales of product having higher P/V Ratio, we can improve overall PV Ratio.

“CONCEPT OF BREAK EVEN ANALYSIS”

It is a technique used for studying relationship between cost, volume and profit at different levels of
operations. Break Even Analysis is used to determine -
1. the amount of profit / loss at various volumes of operations
2. the volume of operations required to earn targeted profit
3. the effect of change in variable cost on profit
4. the effect of change in fixed cost on profit
5. the effect of change in selling price on profit

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 6. the effect of change in sales volume on profits
7. the Volume of operations with no profit or loss
Break Even Point: Break Even point can be defined as "volume of operations at which total sales
revenue is just equal to total cost (i.e. fixed cost and variable cost)". It can also be defined as the "point at
which there is neither profit nor loss or it is the point at which contribution is equal to fixed cost".
Break Even point may be expressed in terms of -
1. Number of units
2. Value of Sales
3. Percentage capacity to be achieved.

Mathematical Equations:
Fixed cos t
Break Even Point (No. of units) =
Contribution per unit
Fixed Cost
Break Even Point (Rs. Sales) =
P/V Ratio
Fixed Cost
Break Even Point (% Capacity) =
Contribution per 1% capacity
Relevance of Break Even Point:
Sales Volume Impact
Below Break Even Loss
At Break Even No profit or loss
Above Break Even Profit
Example 6: Break Even Analysis
X Ltd. has given the following data
Annual Capacity - 1,00,000 units
Selling Price per unit Rs. 150
Variable Cost per unit Rs. 90
Fixed Cost Rs. 24,00,000
Calculate Break Even point.

Understanding the concept:

Rs.
Selling Price per Unit 150
Variable cost per unit 90
Contribution per unit 60
Contribution
P/V Ratio =  100
Sales
60
=  100
150
= 40%

Capacity - 1,00,000 units

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Production at 1% Capacity 1,000 units
Contribution for 1% capacity = 1000 units x Rs. 60
= Rs. 60,000

Break Even Point:

Fixed Cost
Break Even No. of units =
Contribution per unit
24,00,000
=
60
= 40,000 Units

Fixed Cost
Break Even Sales =
P/V Ratio
24,00,000
=
40%
= Rs. 60 lakh Sales

Fixed Cost
Break Even % Capacity =
Contribution per 1% Capacity
24,00,000
=
60,000
= 40 i.e. 40% Capacity

Example 7: Effect On Break Even Point:

Refer data of Example 6. Calculate Break even sale value in each of the following cases -
1. If Selling Price is reduced by 10%
2. If Variable cost is decreased by 10%
3. If Fixed Cost is increased by 10%
4. If Variable Cost as well as fixed cost is increased by 10% and selling price is also increased by 10%

Understanding the concept -

New P/V Ratio:
Situation
Particulars 1 2 3 4
Rs. Rs. Rs. Rs.
Selling Price 135 150 150 165
Less: Variable Cost 90 81 90 99
Contribution per unit 45 69 60 66
P/V Ratio (%) 33.33% 46% 40% 40%
Fixed Cost (Rs. lakhs) 24 24 26.40 26.40

Fixed Cost
Break Even Sales (Rs. lakhs) =
P/V Ratio 72 52.17 66 66

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 Example 8: Profitability
Y Ltd. has given the following data
Selling Price per Unit Rs. 80
Variable Cost per Unit Rs. 60
Annual Capacity Rs. 2.50 lakh Units
Production & Sales Rs. 1.50 lakh Units
Fixed Cost Rs. 20 lakhs
Find Out -
1. Break Even Sales
2. Existing profitability
3. Sales required to earn targeted profit of Rs. 20 lakhs
4. Profitability when sales Rs. 150 lakhs
5. Profitability when 2 lakh units are sold, with decrease in selling price by 5% and increase in fixed
cost by Rs. 5 lakhs

Understanding the Concept -

Situation 1 to 4 Situation 5
Particulars
Rs. Rs.
Selling Price per unit 80 76
Variable cost per unit 60 60
Contribution per unit 20 16
P/V Ratio 25% 21.05%
Fixed Cost 20 25
Fixed Cost
1. Break Even Sales =
P/V Ratio
20
=
25%
= Rs. 80 lakh sales

2. Existing Profitability:
Profit = Contribution - Fixed Cost
= [1.50 lakh units x Rs. 20] - 20
= 30 - 20
= Rs. 10 lakhs

3. Sales required to earn targeted profit of Rs. 20 lakhs:

Fixed cos t + Desired profit
=
P/V Ratio
20 + 20
=
25%
= Rs. 160 lakh Sales

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4. Profitability when sales are Rs. 150 lakhs:
= Contribution - Fixed Cost
= [25% x Rs. 150 lakhs] - 20
= 37.50 - 20
= Rs. 17.50 lakhs

5. Profitability when 2 lakh Units are sold with change in selling price and fixed cost:
= Contribution - Fixed Cost
= [2 kahs Units x Rs. 16] - 25
= 32 - 25
= Rs. 7 lakhs

Composite Break Even Point:

When more than one product is manufactured and sold, it is necessary to arrive at composite Break Even
Point. In this case it is necessary to assume expected sales quantity or sales value mix.

Fixed Cost
Composite Break Even Point (Rs. Sales) =
Composite PV Ratio

“CONCEPT OF MARGIN OF SAFETY”

When actual Sales are above the break even sales volume, there is a margin of safety.
Margin of safety = Actual Sales - Break Even Sales
At any level of margin of safety, fixed costs are zero, since fixed costs are already recovered upto break
even point. Similarly at any level of margin of safety, contribution (i.e. sales less variable cost) is equal to
profits, as fixed costs are are already recovered by break even sales.
Mathematical formulae:
Margin of safety (units) = Actual Sales (units) - Break Even Sales (units)
or
Pr ofit
=
Contribution per unit
Margin of safety (Rs. Sales) = Actual Sales - Break Even Sales
or
Pr ofit
=
P/V Ratio

Margin of safety (% Capacity) = Actual Capacity achieved - Break Even Capacity

M arg in of safety sales
Marginal on safety Ratio =  100
Actual sales

Example No. 9: Margin of safety

Selling Price per unit Rs. 100
Variable Cost per unit Rs. 70

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 Fixed cost Rs. 30 lakhs
Actual Sales Rs. 150 lakhs

Find out
1. Marginal of safety in terms of units
2. Margin of safety in terms of sales
3. Margin of safety ratio
4. Profitability with the help of Margin of safety

Understanding the Concept -

Fixed Cost
Break Even Sales (Units) =
Contribution per unit
30,00,000
= = 1,00,000 units
30

Fixed Cost
Break Even Sales (Rs.) =
P/V Ratio
30,00,000
= = Rs. 100 lakhs
30%

Rs. 150 lakhs

Actual Sales in units =
Rs.100
= 1,50,000 Units
1. Margin of safety (units) = Actual Sales (Units) - Break even Sales (Units)
= 1,50,000 - 1,00,000
= 50,000 units

2. Margin of safety = Actual Sales - Break Even sales

(Rs. sales) = Rs. 150 lakh Sales - Rs. 100 lakh sales
= Rs. 50 lakh Sales

M arg in of safety sales

3. Margin of safety ratio =  100
Actual Sales
Rs. 50 lakhs
=  100
Rs. 150 lakhs
= 33 1/3%

4. Profitability at Sales = Contribution - Fixed Cost

of Rs. 150 lakhs = [(Break Even Sales x PV Ratio) – Fixed Cost] +
[Margin of safety sales x PV Ratio]
= 0 + [50 x 30%]
Rs. 15 lakhs

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Example No. 10: Composite Break Even point
Evenkeel Ltd., manufactures and sells a single product X whose selling price is Rs. 40 per unit and the
variable cost is Rs. 16 per unit.
(a) If the fixed costs for this year are Rs. 4,80,000 and the annual sales are at 60 % margin of safety,
calculate the rate of net return on sales, assuming an income tax level of 40 %.
(b) For the next year, it is proposed to add another product line Y whose selling price would be Rs. 50
per unit and the variable cost Rs. 10 per unit. The total fixed costs are estimated at Rs. 6,66,600.
The sales value mix of X: Y would be 7: 3. At what level of sales next year, would Evenkeel Ltd.,
break-even? Give separately for the both X and Y the break-even sales in rupees and quantities.

Understanding the Concept -

Per Unit
Rs.
1. Selling Price ........... 40
Less: Variable Cost ............ 16
Contribution 24
24
P/V Ratio  100 = 60%
40
Fixed Cost Rs. 4,80,000
2. Break even sales = = = Rs. 8,00,000
P/V Ratio 60%

3. Rate of net return on sales:

Annual Sales are at 60% margin of safety mean break even sales are 40% of Actual sales
Rs. 8,00,000
Actual Sales =
40%
= Rs. 20,00,000
Rs.
Contribution @ 60% 12,00,000
Less: Fixed Cost 4,80,000
Profit before tax 7,20,000
Less: Income Tax @ 40% 2,88,000
Profit after tax 4,32,000
 Rate of return on sales = = 21.6%
or
Profit before tax
= Margin of safety Sales x P.V. Ratio
= 12,00,000 x 60%
= Rs. 7,20,000

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 4. P/V Ratio of Product Y
Rs. Per Unit
Selling Price 50
Less: Variable cost 10
Contribution 40
P/V Ratio 80%

5. Break Even Sales with Sales mix of product X and Y

Sales Mix of 7: 3 is assumed as sale value mix
Sales Value Rs. 100
X Y
Sale Value Rs. 70 Rs. 30
PV Ratio 60% 80%
Contribution 42 24
 42 + 24 
Composite P/V Ratio 66%   100
 100 
Fixed Cost
Break Even Sales =
Composite P/V Ratio
6 ,66,600
= = Rs. 10,10,000 Sales
66%
Sales Value mix.
Sale Value Quantity of Sales
Product Mix
Rs. (units)
X 7/10 7,07,000 17,675
Y 3/10 3,03,000 6,060
10,10,000
If sales mix is given as sales quantity mix 7:3; then With this assumption answer will change.
How to improve upon Margin of Safety:
Margin of safety can be improved -
1. by increasing selling price
2. by reducing variable cost
3. by reducing fixed cost
4. by increasing sales volume
5. by improving profitable sales mix

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6. FORMULAS

1. Variable Cost: = Total Cost - Fixed Cost

or
= Sales - contribution
1A. Variable Cost as % of sales:
Change in Cost
=  100
Change in Sales
or
= 100 - P/V Ratio

2. Fixed Cost: = Total Cost - Variable Cost

or
= Contribution - profit

3. Contribution: = Sales - Variable Cost

or
= Profit + Fixed Cost

3A. Contribution as % of Sales (i.e. P/V ratio).

Contribution
=  100
Sales
or
Change in Pr ofit
=  100
Change in Sales
or
= 100 - Variable Cost as % of Sales
4. Profit: = (Sales - Variable Cost) - Fixed cost
or
= Contribution - Fixed Cost
or
= [Sales Units x Contribution per unit] - Fixed Cost
or
= [Sales (Rs.) x P/V Ratio] - Fixed Cost
or
= Margin of Safety Sales x P/V Ratio

5. Sales: = Cost + Profit

= [Variable Cost + Fixed Cost] + Profit
or
= Variable Cost + Contribution

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 6. Break Even Point:
Fixed Cost
(No. of Units) =
Contribution per unit
Fixed Cost
(Rs. Sales) =
P/V Ratio
Fixed Cost
(% Capacity) =
Contribution per 1% capacity

7. Margin of Safety:
(No. of Units) = Actual Units sold - Break Even Units
(Rs. Sales) = Actual Sales - Break Even Sales
(% Capacity) = Actual Capacity achieved - Break Even % Capacity

8. Margin of Safety Ratio:

M arg in of Safety
=  100
Actual Sales

9. Profitability at desired level of output:

= [No. of units sold x Contribution per unit] - Fixed Cost
= [Sales (Rs.) x P/V Ratio] - Fixed Cost
= [Capacity achieved (%) x Contribution per 1% Capacity]
- Fixed Cost
= [Margin of Safety Sales x P/V Ratio]

10. Volume of sales required to earn desired profit:

Fixed Cost + Desired Pr ofit
(No. of Units) =
Contribution per unit
Fixed Cost + Desired Pr ofit
(Rs. Sales) =
P/V Ratio
Fixed Cost + Desired Pr ofit
(% Capacity) =
Contribution per 1% Capacity
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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL

7. PRACTICAL PROBLEMS

Q1. P/V Ratio, BEP REG. PAGE NO.

The following information is given by Bharat Ltd.
Selling Price per unit Rs. 10, Variable Cost per unit Rs. 6, Fixed Costs Rs. 24,000
You are required to calculate:
(a) Profit-Volume Ratio
(b) Break-even Sales (in Units) and (in Rupees)
(c) Profit when sales are 10% above the Break-even Sales
(d) Sales to earn profit of Rs. 4,000
(e) Sales to earn profit @ 10% on sales
(f) New B.E.P. if selling price is reduced by 10%
(g) New Selling Price if B.E.P. is to be brought down to 4800 units.

Q2. P/V Ratio, BEP, MOS Sales REG. PAGE NO.

The following information is given by Tushar Ltd.
Sales Rs. 80,000, Cost (2/3rd variable) Rs. 72,000
(a) Calculate the P/V Ratio, Break-Even Point, Margin of Safety and Profit at the existing level.
(b) Calculate the effect of following on PV Ratio
i. 10% decrease in selling price
ii. 10% increase in selling price
iii. 10% decrease in variable cost / unit
iv. 10% increase in variable cost / unit
v. 10% decrease in fixed cost
vi. 10% increase in fixed cost
vii. 10% decrease in selling price accompanied by 10% decrease in variable cost
viii. 10% increase in selling price accompanied by 10% increase in variable cost
ix. 10% decrease in sales volume
x. 10% increase in sales volume

Q3. P/V Ratio, BEP, MOS Sales REG. PAGE NO.

A company budgets a production of 10,000 units. The variable cost is estimated at Rs. 2 per unit. The
fixed costs are estimated Rs. 60,000. The selling price is fixed to earn a profit of 25% on cost.
You are required to:
i. Compute break-even point in terms of units and sales; and
ii. Compute how many units must be produced and sold to earn a profit of Rs. 60,000
iii. How many units should be sold to earn profit of 10% on sales?

Q4. P/V Ratio, BEP, MOS Sales REG. PAGE NO.

The following information in given by Rockstar Ltd.:
Profit Rs. 12,000, Fixed Cost Rs. 24,000, Margin of Safety Rs. 30,000

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 You are required to Calculate:
(a) Profit Volume Ratio
(b) Break Even Sales and Actual Sales
(c) Profit when sales are 10% above the Break Even Sales
(d) Sales to earn profit of Rs. 4,000
(e) Sales to earn profit @ 10% on sales
(f) New B.E.P. if selling price is to be reduced by 10%
(g) New B.E.P. if variable cost is to be increased by 25%
(h) Sales to earn the same amount of profit if the selling price is reduced by 10%

Q5. BEP and Profitability REG. PAGE NO.

From the following data, you are required to calculate break-even point and net sales value at this point:
Direct Material Cost per unit Rs. 8
Direct Labour Cost per unit Rs. 5
Fixed overheads Rs. 24,000
Trade Discount on sales 4%
Variable Overheads @ 60% on direct labour
Selling price per unit Rs. 25
If Sales are 15% above the break-even volume, determine the net profit.

Q6. Evaluation of alternative Proposals REG. PAGE NO.

The following data relate to a manufacturing company:
Plant Capacity: 4,00,000 units per annum. Present utilisation: 40%
Actuals for the current year:
Selling Price Rs. 50 per unit Variable Manufacturing Cost Rs. 15 per unit
Material Cost Rs. 20 per unit Fixed Costs Rs. 27 lakhs
In order to improve capacity utilisation the following two alternative proposals are considered:
i. Reduce selling price by 10%
ii. Spend additionally Rs. 3 lakhs on sales promotion.
Required: How many units should be sold to earn a profit of Rs. 5 lakhs in a year under each of these
proposals?

Q7. Cross Calculation REG. PAGE NO.

(i) Ascertain profit, when sales = Rs. 2,00,000
Fixed Cost = Rs. 40,000
BEP = Rs. 1,60,000

(ii) Ascertain sales, when fixed cost = Rs. 20,000

Profit = Rs. 10,000
BEP = Rs. 40,000

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Q8. Missing Figures REG. PAGE NO.
Fill in the blanks for each of the following independent situations:
A B C D E
Selling Price per unit ... Rs. 50 Rs. 20 ... Rs. 30
Variable Cost as %
of Selling Price 60 ... 75 75 ...
No. of units sold 10,000 4,000 ... 6,000 5,000
Marginal contribution Rs. 20,000 Rs. 80,000 ... Rs. 25,000 Rs. 50,000
Fixed Costs Rs. 12,000 …. Rs. 1,20,000 Rs. 10,000 ...
Profit/Loss ... Rs. 20,000 Rs. 30,000 ... Rs. 15,000

Q9. Sales at desired Profitability REG. PAGE NO.

Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to product Z
during the quarter II of the financial year 2009-10 will be Rs. 2,80,000.
Calculate the sales revenue required to achieve a quarterly profit of Rs. 70,000.

Q10. Sales, BEP, MOS REG. PAGE NO.

A company has fixed cost of Rs. 90,000, Sales Rs. 3,00,000 and Profit of Rs. 60,000.
Required:
(i) Sales volume if in the next period, the company suffered a loss of Rs. 30,000.
(ii) What is the margin of safety for a profit of Rs. 90,000?

Q11. P/V Ratio, BEP, MOS REG. PAGE NO.

A company produces single product which sells for Rs. 20 per unit. Variable cost is Rs. 15 per unit and
Fixed overhead for the year is Rs. 6,30,000.
Required:
(a) Calculate sales value needed to earn a profit of 10% on sales.
(b) Calculate sales price per unit to bring BEP down to 1,20,000 units.
(c) Calculate margin of safety sales if profit is Rs. 60,000.

Q12. Overall BEP REG. PAGE NO.

A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution
margins per unit are Rs. 40 for J and Rs. 20 for K. Fixed costs are Rs. 6,16,000 per month. Compute overall
break-even point

Q13. P/V Ratio, BEP, MOS, Sales for desired Profitability REG. PAGE NO.
MNP Ltd sold 2,75,000 units of its product at Rs. 37.50 per unit. Variable costs are Rs. 17.50 per unit
(manufacturing costs of Rs. 14 and selling cost Rs. 3.50 per unit). Fixed costs are incurred uniformly
throughout the year and amount to Rs. 35,00,000 (including depreciation of Rs. 15,00,000). There are no
beginning or ending inventories.
Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.

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 (iii) Estimate the number of units that must be sold to earn an income (EBIT) of Rs. 2,50,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of Rs. 2,50,000. Assume 40% corporate
Income Tax rate.

Q14. P/V Ratio, BEP, MOS REG. PAGE NO.

The PV Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units for Rs.
5,00,000. You are required to calculate:
(i) Break even point, and
(ii) Sales in units to earn a profit of 10% on sales

Q15. P/V Ratio, BEP, MOS, Sales for desired Profitability REG. PAGE NO.
The following figures are related to LM Limited for the year ending 31st March, 2012:
Sales - 24,000 units @ Rs. 200 per unit;
P/V Ratio 25% and Break-even Point 50% of sales.
You are required to calculate:
(i) Fixed cost for the year
(ii) Profit earned for the year
(iii) Units to be sold to earn a target net profit of Rs. 11,00,000 for a year.
(iv) Number of units to be sold to earn a net income of 25% on cost.
(v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

Q16. P/V Ratio, BEP, MOS, Sales for desired Profitability REG. PAGE NO.
SHA Limited provides the following trading results:
Year Sale Profit
2012-13 Rs. 25,00,000 10% of Sale
2013-14 Rs. 20,00,000 8% of Sale
You are required to calculate:
(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is Rs. 30,00,000
(iv) Sale, when desired profit is Rs. 4,75,000
(v) Margin of Safety at a profit of Rs. 2,70,000

Q17. P/V Ratio, BEP, MOS, Sales for desired Profitability REG. PAGE NO.
Zed Limited sells its product at Rs. 30 per unit. During the quarter ending on 31st March, it produced and
sold 16,000 units and
suffered a loss of Rs. 10 per unit. If the volume of sales is raised to 40,000 units, it can earn a profit of Rs.
8 per unit.
You are required to calculate:
(a) Break Even Point in Rupees.
(b) Profit if the sale volume is 50,000 units.
(c) Minimum Level of Production where the Company need not to close the production if unavoidable
Fixed Cost is Rs. 1,50,000.

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 CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
Q18. P/V Ratio, BEP, MOS, Sales for desired Profitability REG. PAGE NO.
A dairy product company manufacturing baby food with a shelf life of one year furnishes the following
information:
(i) On 1st January, 2016, the company has an opening stock of 20,000 packets whose variable cost is
Rs. 180 per packet.
(ii) In 2015, production was 1,20,000 packets and the expected production in 2016 is 1,50,000
packets. Expected sales for 2016 is 1,60,000 packets.
(iii) In 2015, fixed cost per unit was Rs. 60 and it is expected to increase by 10% in 2016. The variable
cost is expected to increase by 25%. Selling price for 2016 has been fixed at Rs. 300 per packet.
You are required to calculate the Break-even volume in units for 2016.

Q19. Evaluation of Processes REG. PAGE NO.

(i) The M-Tech Manufacturing Company is presently evaluating two possible processes for the
manufacture of a toy. The following information is available:
Particulars Process A (Rs.) Process B (Rs.)
Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000
Suggest:
1. Which process should be chosen?
2. Would you change your answer as given above, if you were informed that the capacities of
the two processes are as follows:
A - 6,00,000 units; B - 5,00,000 units? Why?
(ii) State the difference between Fixed Budget and Flexible Budget.

Q20. P/V Ratio, BEP, MOS, Impact on Profitability REG. PAGE NO.
A company has introduced a new product and marketed 20,000 units. Variable cost of the product is Rs.
20 per unit and fixed overheads are Rs. 3,20,000.
You are required to:
(i) Calculate selling price per unit to earn a profit of 10% on sales value, BEP and Margin of Safety.
(ii) If the selling price is reduced by the company by 10%, demand is expected to increase by 5000
units, then what will be its impact on Profit, BEP and Margin of Safety?
(iii) Calculate Margin of Safety if profit is Rs. 64,000.

Q21. Key Factor Analysis (Material and Labour) REG. PAGE NO.
The following particulars are taken from the records of a company engaged in manufacturing of two
products, A and B, from a certain material:
Product A Product B
(per unit) (per unit)
Rs. Rs.
Sales 2,500 5,000
Material cost (Rs. 50 per kg) 500 1,250
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 Direct labour (Rs. 30 per hour) 750 1,500
Variable overhead 250 500
Total fixed overheads: Rs. 10,00,000
Comment on the profitability of each product when:
(i) Total sales in value is limited.
(ii) Raw materials is in short supply.
(iii) Production capacity (in terms of Labour Hours) is the limiting factor.
(iv) Total availability of raw materials is 20,000 kg. and maximum sales potential of each product is
1,000 units, find the product mix to yield maximum profits.
(v) Total Labour Hours available are 40,000 Hrs and maximum sales potential of each product is 1000
units, find product mix to yield maximum profits.
Q22. Marginal Costing vs Absorption Costing REG. PAGE NO.
ABC Motors assembles and sells motor vehicles. It uses an actual costing system, in which unit costs are
calculated on a monthly basis. Data relating to March and April, 2000 are:
March April
Unit data:
Beginning Inventory 0 150
Production 500 400
Sales 350 520
Variable-cost data:
Manufacturing Costs per unit produced Rs. 10,000 Rs. 10,000
Distribution costs per unit sold 3,000 3,000
Fixed-cost data:
Manufacturing Costs Rs. 20,00,000 Rs. 20,00,000
Marketing Costs 6,00,000 6,00,000
The selling price per motor vehicle is Rs. 24,000
Required:
(i) Present income statements for ABC Motors in March and April of 2000 under (a) variable costing,
and (b) absorption costing.
(ii) Explain the differences between (a) and (b) for March and April.
Q23. Marginal Costing vs Absorption Costing REG. PAGE NO.
ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable production
costs are Rs. 40 per unit and the variable selling expenses are Rs. 12 per sold unit. The budgeted fixed
production expenses were Rs. 24,00,000 per annum and the fixed selling expenses were Rs. 16,00,000.
During the year ended 31st March, 2008, the company worked at 80% of its capacity. The operating data
for the year are as follows:
Production 3,20,000 units
Sales @ Rs. 80 per unit 3,10,000 units
Opening stock of finished goods 40,000 units
Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses are recovered
on the basis of period.
You are required to prepare Statements of Cost and Profit for the year ending 31st March, 2008:
(i) On the basis of marginal costing
(ii) On the basis of absorption costing.
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Q24. Marginal Costing vs Absorption Costing REG. PAGE NO.
Mega Company has just completed its first year of operations. The unit costs on a normal costing basis
are as under:
Rs.
Direct material 4 kg @ Rs. 4 = 16.00
Direct labour 3 hrs @ Rs. 18 = 54.00
Variable Production overhead 3 hrs @ Rs. 4 = 12.00
Fixed Production overhead 3 hrs @ Rs. 6 = 18.00
100.00
Selling and administrative costs:
Variable Rs. 20 per unit
Fixed Rs. 7,60,000
During the year the company has the following activity:
Units produced = 24,000
Units sold = 21,500
Unit selling price = Rs. 168
Direct labour hours worked = 72,000
Actual fixed Production overhead was Rs. 48,000 less than the budgeted fixed overhead. Budgeted
variable Production overhead was Rs. 20,000 less than the actual variable overhead. The company used
an expected activity level of 72,000 direct labour hours to compute the predetermine overhead rates.
Required:
(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Find Actual Variable and Fixed Production overheads.
(iii) Reconcile the difference between the total income under absorption and marginal costing.

Q25. CVP Analysis REG. PAGE NO.

The following information was obtained from the records of a manufacturing unit:
Rs. Rs.
Sales 80,000 units @ Rs. 25 20,00,000
Material consumed 8,00,000
Variable Overheads 2,00,000
Labour Charges 4,00,000
Fixed Overheads 3,60,000 17,60,000
Net Profit 2,40,000
Calculate:
(i) The number of units by selling which the company will neither lose nor gain anything.
(ii) The sales needed to earn a profit of 20% on sales.
(iii) The extra units which should be sold to obtain the present profit if it is proposed to reduce the
selling price by 20% and 25%.
(iv) The selling price to be fixed to bring down its Break-even Point to 10,000 units under present
conditions.

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 4. PAST EXAM THEORY QUESTIONS

Q1. Discuss basic assumptions of Cost Volume Profit analysis.

Ans. CVP Analysis:-Assumptions
(i) Changes in the levels of revenues and costs arise only because of changes in the number of
products (or service) units produced and sold.
(ii) Total cost can be separated into two components: Fixed and variable
(iii) Graphically, the behaviour of total revenues and total cost are linear in relation to output level
within a relevant range.
(iv) Selling price, variable cost per unit and total fixed costs are known and constant.
(v) All revenues and costs can be added, sub traded and compared without taking into account the
time value of money.
Q2. Elaborate the practical application of Marginal Costing.
Ans. Practical applications of Marginal costing:
(i) Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions on
pricing policy can be taken particularly in short term.
(ii) Decision Making: Marginal costing helps the management in taking a number of business
decisions like make or buy, discontinuance of a particular product, replacement of machines, etc
(iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished goods
and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to
profit and loss account as period cost. This shows the true profit of the period.
(iv) Determination of production level: Marginal costing helps in the preparation of break-even
analysis which shows the effect of increasing or decreasing production activity on the profitability of the
company.
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“The Height of SUCCESS depends on how Hight you bounce back, when you
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hit the bottom of your life”. -ANSHUL A. AGRAWAL
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