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Marginal Costing and Cost-Volume-Profit (CVP) Analysis: Hammad Javed Vohra, FCCA

Marginal costing and cost-volume-profit (CVP) analysis are techniques used for managerial decision making. [1] Marginal costing treats variable costs as product costs and fixed costs as period costs. [2] CVP analysis studies the relationship between costs, volume, and profit at different activity levels. It helps determine the break-even point and margin of safety. [3] Target profits can be set using CVP analysis by determining the sales volume needed to cover fixed costs and achieve a desired profit level.

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Urooj Mustafa
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76 views25 pages

Marginal Costing and Cost-Volume-Profit (CVP) Analysis: Hammad Javed Vohra, FCCA

Marginal costing and cost-volume-profit (CVP) analysis are techniques used for managerial decision making. [1] Marginal costing treats variable costs as product costs and fixed costs as period costs. [2] CVP analysis studies the relationship between costs, volume, and profit at different activity levels. It helps determine the break-even point and margin of safety. [3] Target profits can be set using CVP analysis by determining the sales volume needed to cover fixed costs and achieve a desired profit level.

Uploaded by

Urooj Mustafa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Marginal Costing

and
Cost-Volume-
Profit (CVP)
Analysis

Hammad Javed Vohra, FCCA


What is Marginal Costing?
• In contrary to Absorption Costing, which aims to absorb
all Production cost into a Product, Marginal Costing is a
technique which treat only variable cost as product cost,
while all fixed cost are considered as Period cost.

• The term marginal cost implies the additional cost


involved in producing an extra unit of output.

• Marginal Costing is used for decision making purposes.


What is Marginal Costing?
This includes
DM, DL +
Manufacturing
Variable OHDs

All other variable


cost such as
Selling, Admin
etc.

This includes
All type of Fixed
cost (product &
period)
What is Marginal Costing?
Example
• ABC makes a product, 123, which has a variable
production cost $5 per unit, variable marketing & selling
cost of $2 and a sales price of $10 per unit. At the
beginning of September 2020, there were no opening
inventories and production during the month was 20,000
units. Fixed Cost for the month were $45,000
(production, administration, sales & distribution).
• Required: Calculate the contribution and profit for
September, using the principles of Marginal Costing, if
Sales were i) 10,000 ii) 15,000 units iii) 20,000
10,000 Units 20,000 Units
Sales 100,000 Sales 200,000
Less: Cost of Sales Less: Cost of Sales
Opening Inventory - Opening Inventory -
Variable Production Cost 100,000 Variable Production Cost 100,000
Closing Inventory (50,000) Closing Inventory -
Variable Cost of Sales (50,000) Variable Cost of Sales (100,000)
50,000 100,000
Less: Other Variable Cost (20,000) Less: Other Variable Cost (40,000)
Contribution 30,000 Contribution 60,000

Less: Fixed Cost (45,000) Less: Fixed Cost (45,000)


Loss (15,000) Profit 15,000
Cost-Volume-Profit (CVP) Analysis
• CVP (based on the principles of Marginal Costing) is the
study of interrelationship between costs, volume and
profit at various levels of activity.

• This is a technique used by management for decision


making.

• CVP has certain limitations due to the assumption the


concept is based on.
Cost-Volume-Profit (CVP) Analysis
• Sales price per unit is constant.
• Variable costs per unit are constant.
• Total fixed costs are constant.
• Everything produced is sold.
• Costs are only affected because activity changes.
• If a company sells more than one product, they are sold
in the same mix.
Cost-Volume-Profit (CVP) Analysis
• Breakeven Point:
• It is the activity level at which there is neither a profit nor a loss.
• The amount by which actual sales can fall below Anticipated
Sales, without a loss being incurred.

• Breakeven Point (in Unit):


Total Fixed Cost
Contribution Per Unit

= No. of units of sale required to break-even


Cost-Volume-Profit (CVP) Analysis
• Breakeven Point (in Revenue or $):

Total Fixed Cost


Contribution Margin or C/S Ratio

Where, Contribution Margin or C/S Ratio is Contribution


Sales

= Amount of sale required to break-even


Cost-Volume-Profit (CVP) Analysis
Break-even Point (in Units)= 21000
3
= 7,000 units of sales required to achieve break-even

Break-even Point (in $) = 21000


0.375
= $ 56,000 worth of sales required to achieve break-even
Cost-Volume-Profit (CVP) Analysis
• Margin Of Safety:
• It helps management in understanding how much room they
have with respect to sales, before the company will start making
losses.
• It is difference between Budgeted Sales (units) and Break-even
sales (units). Often expressed as a % of budgeted sales unit.
• Margin of Safety may also be calculated as Budgeted Sales
Revenue and Break-even sales revenue, and then expressed as a
% of budgeted sales revenue.
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
• Target Profits
• Now that we understand that at breakeven point, Total
Contribution is equal to Total Fixed Cost, we can use this
concept to set target for the required profits.
• The target profit is achieved when,
• Sales = Variable Cost + Fixed Cost + Required Profit OR
• Sales – Variable Cost = Fixed Cost + Required Profit
• So, Required Contribution = Fixed Cost + Required Profit
• Target Profits help companies understand the level of sales they
have to make in order achieve required profit.
Fixed Cost + Required Profit Fixed Cost + Required Profit
Contribution per Unit Contribution Margin
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) Analysis

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