14 Marginal Costing

CHAPTER

Marginal Cost • It is 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.
• In other words, it is the incremental cost of production for producing one
additional unit of product.
• In other words, with the increase in one unit of output the total cost is
increased and this increase in total cost due to change in the volume of
output is known as marginal cost.
Marginal Costing • It is the ascertainment of marginal costs and of the effect on profit of
changes in volume or type of output, by differentiating between the fixed
costs and variable cost.
• Marginal costing is a technique which presents management with required
information enabling it to measure the profitability of an undertaking by
considering the behavior of costs.
• It is a costing system where products or services and inventories are
valued at variable cost only.
Characteristics of • All elements are classified into fixed and variable components.
Marginal costing • The variable costs are treated as the cost of product.
• Value of finished goods and work-in-progress is valued at marginal cost
basis only.
• Fixed cost are treated as period costs.
• Profitability is determined with reference to their contribution margin.
Advantages of • Help in managerial decisions – The most important advantage of
Marginal Costing variable costing is the assistance that it renders to management in taking
many valuable decisions.
• Cost Control – Greater control over cost is possible. This is so because by
classifying costs in fixed and variable, the management can concentrate
more on the control of variable cost which are generally controllable and
pay less attention to fixed costs which may be controlled only by the top
management and that too, to a limited extent.
• Constant cost per unit – Marginal costing takes into account only
variable costs which remain the same per unit of product irrespective of
the volume of output. It therefore avoids the effect of varying cost per unit
as it ignores fixed costs which are incurred on a time basis and have no
relation with the size of production.
 • No under and over-absorption of overheads – In marginal costing,
there is no problem of under-or-over absorption of overheads.
• id to rofit lanning To aid profit planning marginal costing technique
enables data to be presented to management is such a way as to show
cost-volume-profit relationship.
• Simple technique – Variable costing is comparatively simple to operate
because it avoids the complications involved in allocation, apportionment
and absorption of fixed overheads which is, in fact, arbitrary division of
indivisible fixed costs.
• Realistic valuation of stocks – In marginal costing, stocks of work-in-
progress and finished goods are valued only at variable costs. Thus, no
fictitious profits can arise due to fixed cost being absorbed and capitalized
in unsold stock. Stock valuation in marginal costing, is, therefore more
realistic and uniform.
• Valuable addition to other technique – Marginal costing is a valuable
addition to standard costing and budgetary control.
Limitations of • Diffic lty in classifying fixed and variable ele ents It is difficult
Marginal Costing to classify exactly the expenses into fixed and variable category. Most of
the expenses are neither totally variable nor wholly fixed. For example,
various amenities provided to workers may have no relation either to
volume of production or time factor.
• De endence of ey factors Contribution of a product itself is not a
guide for optimum profitability unless it is linked with the key factor.
• Ignores time factor and investment - Marginal costing ignores time factor
and investment. For example, the marginal cost of two jobs may be the
same but the time taken for their completion and the cost of machines used
may differ. The true cost of a job which takes longer time and uses costlier
machine would be higher. This fact is not disclosed by marginal costing.
• Unpredictable nature of cost - Some of the assumptions regarding the
behavior of a various costs are not necessarily true in a realistic situation. For
example, the assumption that fixed cost will remain static throughout is not
correct. Fixed cost may change from one period to another. For example, salary
bill may go up because of annual increments or due to change in pay rate etc.
• a lty val ations Overheads of fixed nature cannot altogether be
excluded particularly in large contracts, while valuing the work-in-
progress. In order to show the correct position, fixed overheads have to
be included in work-in-progress.
• co e for lo rofitability Sales staff may mistake marginal cost for
total cost and sell at a price; which will result in loss or low profits. Hence,
sales staff should be cautioned while giving marginal cost.
Absorption Costing • It is an approach to product costing in which all manufacturing costs,
variable costs and fixed costs are charged to the cost of goods manufactured
and inventories.
• In absorption costing all manufacturing costs variable and fixed are
charged to products, material and labour costs by direct measurement
while indirect manufacturing costs by some methods of apportionment.
Marginal Costing 431
Difference between Basis Absorption Costing Marginal Costing
absorption and
1. Calculation of Absorption rate includes, Marginal costing rate
marginal costing
manufacturing both fixed and variable includes only variable
overhead rates manufacturing overheads. manufacturing overhead.
2. Valuation of Valuation is on Product Valuation will be at
inventory cost i.e. Prime cost + Prime cost + applied
applied fixed and variable variable manufacturing
manufacturing overhead. overhead.
3. Classification of Overheads may be classified Overheads are classified
Overhead as factory, administrative, as variable and fixed.
selling and distribution
4. Operating profit Gross Profit Contribution
= Net sales – Prime = Net sales – variable
cost - fixed and variable manufacturing cost of
manufacturing overheads goods sold – variable
administrative selling
and distribution
overhead
5. Net operating Net operating profit Net operating profit
profit = Gross profit – = Contribution - fixed
administrative selling and manufacturing overhead
distribution overheads – fixed administrative
(fixed and variable) overhead – fixed
selling and distribution
overhead
6. Effect of stock The difference in the The difference in the
valuation magnitude of opening and magnitude of opening
closing stock affect the unit and closing stock doesn’t
cost of production. affect the unit cost of
production.
7. Decision Making It distorts decision making It aids decision making
Difference in rofit • No Opening or closing stock – Both profit/loss will be equal.
under Marginal • When opening stock is equal to closing stock – Both profit/loss will be
and Absorption equal provided fixed cost in both stock is same.
costing • When closing stock is more than opening stock – Profit as per
absorption will be more than marginal.
• When opening stock is more than closing stock – Profit in marginal
will be more than absorption.
Cost ol e Profit • It studies the variations in cost and profit in relation to change in the
C P nalysis volume of output and sales though a large number of internal and external
factors influence e.g. the amount of profit, the volume of output etc.
• The three factors of CVP analysis are interlinked and interdependent.

432 Cost and Management Accounting

Importance • Profit Planning In profit planning it becomes essential to know the
and uses of CVP relationship between cost, volume and profit. The most important feature
nalysis of C-V-P analysis is the manner in which it relates cost, selling price and
volume and enable calculation to be made to show the effect of change
in these on profit. Accordingly, the management can plan profit with
C Profit reference to C-V-P analysis.
Decision depend • Decision Making - C-V-P analysis is very useful in taking managerial
on Cost Budget] decisions like make or buy, pricing, selection of a product mix, selection of
best method of production, etc.
• Cost Control - In the field of cost control C-V-P analysis is of great
assistance to the management. The effect of cost of change in the volume
can be evaluated for the purpose of reviewing profits earned and cost
incurred.
• Pre aration of lexible B dget - C-V-P analysis is of special help in the
preparation of fixed budget which indicates cost and profit at different
levels of activity.
Assumption • All costs can be divided into fixed and variable category.
nderlying C P • This analysis relates to the given capacity i.e., it is basically a short- term
nalysis analysis.
• It assumes that variable cost fluctuates with volume proportionally.
• This analysis presumes that fixed cost remains constant over a given
volume.
• Selling price per unit remains constant.
• Costs and revenues are influenced only by the volume of output and sales.
• Production technology and level of efficiency remains constant.
• This analysis relates to a single product-mix which remains constant.
• This analysis also presumes that prices of input factors will remain
constant.
• All stocks, both opening and closing are valued at variable cost.
Methods for • evels of o t t co ared to levels of ex enses et od The output
Segregation of at two different levels is compared with corresponding level of expenses.
Semi-variable Since the fixed expenses remain constant, the variable overheads are
overheads arrived at by the ratio of change in expenses to change in output.

Change in amount of expenses

Variable element=
Saving in activity or output
• Range method – This method is similar to the previous method except
that only the highest and lowest points are considered out of various
levels. This method is also designated as ‘high and low’ method.
• Degree of variability et od In this method, degree of variability is
noted for each item of semi-variable expenses. Some semi-variable items
may have 30% variability while others may have 70% variability. The
method is easy to apply but difficult is faced in determining the degree of
variability.

Marginal Costing 433

Contribution • The difference between selling price and variable cost (i.e. the marginal
cost) is known as ‘Contribution’ or ‘Gross Margin’.
• The idea is that after deducting the variable costs from sales, the figure
remaining is the amount that contributes to fixed costs, and once fixed
costs are covered, then to profits.
Contribution = Selling price – Variable cost = Fixed cost + Profit
Profit ol e • Profit-volume ratio establishes a relationship between the contribution
atio P atio and the sales value.
• It is an indicator of the rate at which profit is being earned.
• This ratio can also be called as ‘Contribution/Sales’ ratio.
• This ratio can also be known by comparing the change in contribution to
change in sales or change in profit to change in sales.
• This ratio would remain constant at different levels of production.
Contribution Sales - Variable Costs
P/V Ratio= =
Sales Sales
Change in contribution Change in profit
= =
Change in Sales Change in Sales

Improvement in • It can be improved by widening the gap between sales and variable cost.
P atio This can be achieved by:
¾ Increasing the selling price
¾ Reducing the variable cost
¾ Changing the sales mix, i.e., selling more of those products which
have larger P/V ratio, thereby improving the overall P/V ratio
Break-even • In its narrow sense it is concerned with finding out the break- even point.
nalysis • Break-even-point is the point at which total revenue is equal to total cost.
• In other words, it is the point of no profit or no loss.
• In other words, it is the level at which contribution is just able to recover
the fixed cost.
• In its broad sense, break-even analysis refers to a system of analysis
that can be used to determine the probable profit/loss at any level of
production.
Fixed Cost
Break-even Point units =
Contribution per unit

Fixed Cost
Break-even Point in sales value =
P/V Ratio
Assumptions • Fixed Costs remain unchanged at all levels of activity.
nderlying Brea • Variable cost change in direct proportion to the volume of output.
even analysis • Costs can be classified into fixed and variable elements.
• Selling price remains constant irrespective of volume or production or
sales changes.
• Price of raw materials, labour rate etc., remain constant.

434 Cost and Management Accounting

Cash Break-even • It is the level of output or sales where there will be “no cash profit and no
Point cash loss”.
• In other words it is that activity level where the cash inflows will be just
equal to cash required to meet immediate cash liabilities.
• At this point, cash contribution equals the cash fixed cost, i.e. fixed cost
excluding depreciation and deferred expenses.
• For this purpose, the fixed costs are divided into two categories: (i) Fixed
Costs which do not require immediate cash outlay e.g. depreciation,
deferred expenses, and (ii) Fixed Costs which require immediate cash
outlay, e.g. rent, salaries, etc.

Cash Fixed Cost

Cash Break-even Point units =
Cash Contribution per unit
Cash Fixed Cost
Cash Break-even Point in value =
P/V Ratio

Angle of Incidence • This is the angle formed at the break-even point at which the sales line
cuts the total cost line.
• This angle of incidence indicates that profits are being made.
• Large angle of incidence is an indication that profits are being made of
rupee at higher rate.
• A small angle of incidence shows a low rate of profit and suggests that
variable cost forms the major part of cost of production.
• A large angle of incidence with a high margin of safety indicates the
most favorite position of a business and even the existence of monopoly
conditions.
argin of afety • It may be defined as the difference between actual sales and sales at
break-even point.
• Margin of safety may be expressed in absolute money terms or as a
percentage of sales.
• The size of the margin of safety indicates soundness of a business.
• When margin of safety is large it means the business can still make profits
after a serious fall in sales.
• When margin of safety is low, any loss of sales may be a matter of serious
concern.

Margin of Safety in Rs. =Actual sales - Break even Sales

Margin of Safety in units =Actual sales - Break even Sales

Profit
Margin of Safety in Rs. =
P/V Ratio
Profit
Margin of Safety in units =
Contribution per unit

Marginal Costing 435

Application of • Identification of problem
C P nalysis in • Identification of options
Decision Making • Evaluation of the options
• Selection of the option
Relevant Cost • A cost is treated as relevant only if it is a future cost and it differs under
two options under consideration.
xa le of • Historical cost – Irrelevant e.g. book value of machinery
Relevant and • Sunk cost – Irrelevant e.g. cost of drawing, blueprint
Irrelevant Cost • Committed cost – Irrelevant e.g. salary cost to employees
• ort nity cost elevant
• Notional or imputed cost – Relevant e.g. notional interest
• Shut down cost – Relevant
ey actor • The factor which may limit the activity level of a firm is known as the ‘key
factor’.
• In most of the cases ‘sales’ is the key factor. Some other factor such as
labour; machine capacity, material, etc. may not be available in requisite
quantity will be a key factor as well.
• Key factor governs the decision “how much to produce”.
• The ‘maximizing contribution per unit of the limiting factor’ rule can be
of value, but can only be used where there is a single binding constraint
and where the constraint is continuously divisible i.e. it can be altered one
unit at a time.

PRACTICAL QUESTIONS
1. By noting “PV will increase or PV will decrease or PV will not change”, as the case may be, state
how the following independent situations will affect the PV ratio: [SM]
(i) An increase in the physical sales volume
(ii) An increase in the fixed cost
(iii) An increase in the variable cost per unit
(iv) A decrease in the contribution margin
(v) An increase in selling price per unit
(vi) A decrease in the fixed cost
(vii) A 10 increase in both selling price and variable cost per unit
(viii) A 10 increase in the selling price per unit and 10 decrease in the physical sales volume.
(ix) A 50 increase in the variable cost per unit and 50 decrease in the fixed cost
(x) An increase in the angle of incidence
2. A factory manufacturing sewing machines has the capacity to produce 500 machines per annum.
The marginal (variable) cost of each machine is `200 and each machine is sold for `250. Fixed
overheads are `12,000 per annum. Calculate the break-even points for output and sales and show
what profit will result if output is 90% of capacity?

436 Cost and Management Accounting

Ans. 240 machines; `60,000; Profit = `10,500.
3. From the following data, calculate
(a) P/V Ratio
(b) Profit when sales are `20,000 and
(c) New Break-even point if selling price is reduced by 20 .
Fixed expenses `4,000
Break-even point `10,000
Ans. (a) 40 ; (b) `4,000; (c) `16,000.

4. Given the following information:

Fixed cost = `4,000
Break even sales = `20,000
Profit = `1,000
Selling price per unit = `20
You are required to calculate:
(a) Sales and marginal cost of sales, and
(b) New break-even point if selling price is reduced by 10
Ans. (a) `25,000; `20,000; (b) `36,000.

5. The ratio of variable cost to sales is 70 . The break-even point occurs at 60 of the capacity
sales. Find the capacity sales when fixed costs are `90,000. Also compute profit at 75% of the
capacity sales. [SM]
Ans. Sales = `5,00,000; Profit = `22,500.

6. SK Ltd. sold 2,75,000 units of its product at `37.50 per unit. Variable costs are `17.50 per
unit(manufacturing costs of `14 and selling cost `3.50 per unit). Fixed costs are incurred uniformly
throughout the year and amounting to `35,00,000 (including depreciation of `15,00,000). There
is no beginning or ending inventories. [SM]
Required to compute breakeven sales level quantity and cash breakeven sales level quantity.
Ans. 1,75,000 units; 1,00,000 units.

7. Following information are available for the year 2013 and 2014 of SK Limited:

Year 2013 2014

Sales `32,00,000 `57,00,000
Profit/(Loss) (`3,00,000) `7,00,000
Calculate – (a) PV ratio, (b) total fixed cost, and (c) Sales required to earn a profit of `12,00,000.
Ans. (a) 40 ; (b) `15,80,000; (c) `69,50,000.
Marginal Costing 437
 8. SK Ltd. sells its product at `15 per unit. During the quarter ending on 31st March, it produced
and sold 8,000 units and suffered a loss of `5 per unit. If the volume of sales is raised to 20,000
units, it can earn a profit of `4 per unit. i ilar ay
You are required to calculate:
(a) Break-even point in rupees
(b) Profit if the sale volume is 5250,000 units
(c) Minimum level of production where the company needs not to close the production if
unavoidable fixed costs is `75,000.
Ans. (a) `1,80,000; (b) `1,30,000; (c) 4,500 units.

9. SK Ltd. maintains margin of safety of 37.5% with an overall contribution to sales ratio of 40%.
Its fixed costs amount to ` 5,00,000. Calculate the following: [SM]
(a) Break-even sales
(b) Total sales
(c) Total variable cost
(d) Current profit
(e) New ‘margin of safety’ if the sales volume is increased by 7.5 .
Ans. (a) `12,50,000; (b) `20,00,000; (c) `12,00,000; (d) `3,00,000; (e) 41.86 .

10. SK Ltd. reports the following cost structure at two capacity levels:

2,000 units 1,500 units

(100 capacity)
Production overhead I `3 per unit `4 per unit
Production overhead II `2 per unit `2 per unit
If the selling price, reduced by direct material and labour is `8 per unit, what would be its break-
even point?
Ans. 1,000 units.

11. SK Ltd. has furnished the following data for the two years:
2017 2018
Sales `8,00,000 ?
Profit/volume ratio (P/V Ratio) 50% 37.5%
Margin of safety sales as % of total sales 40% 21.875%
There has been substantial savings in the fixed cost in the year 2018 due to the restructuring
process. The company could maintain its sales quantity level of 2017 in 2018 by reducing the
selling price. You are required to calculate the following:
(a) Sales for 2018 in `
(b) Break-even sales for 2018 in `
(c) Fixed cost for 2018
Ans. (a) `6,40,000; (b) `5,00,000; (c) `1,87,500.
438 Cost and Management Accounting
12. The following figures are related to SK Limited far the year ending 31st March:
Sales - 24,000 units `200 per unit;
P/V Ratio 25 and Break-even Point 50 of sales.
You are required to calculate:
(a) Fixed cost for the year
(b) Profit earned for the year
(c) Units to be sold to earn a target net profit of `11,00,000 for a year.
(d) Number of units to be sold to earn a net income of 25 on cost
(e) Selling price per unit if Break-even Point is to be brought down by 4,000 units.
Ans. (a) `6,00,000; (b) `6,00,000; (c) 34,000 units; (d) 60,000 units; (e) `300.

13. A Ltd. manufacture and sales its product R-9. The following figures have been collected from cost
records of last year for the product R-9:

Elements of Cost Variable Cost Portion ixed Cost

Direct Material 30% of Cost of Goods Sold -
Direct Labour 15% of Cost of Goods Sold -
Factory Overheads 10% of Cost of Goods Sold `2,30,000
General & Administration Overheads 2% of Cost of Goods Sold `71,000
Selling & Distribution Overhead 4% of Cost of Sales `68,000
Last Year 5,000 units were sold at `185 per unit. From the given data find the followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in )
(d) Profit if the sales were 10 less than the actual sales.
(Assume that administration overheads are related with production activity)
Ans. (a) `6,90,882; (b) `1,25,000; (c) 25.31 ; (d) `75,600.

14. SK Ltd. manufactures a product “SK”. In the month of March, 14,000 units of the product “SK”
were sold, the details are as under:

(`)
Sale Revenue 2,52,000
Direct Material 1,12,000
Direct Labour 49,000
Variable Overheads 35,000
Fixed Overheads 28,000
A forecast for the month of April, has been carried out by the General manger of SK Ltd. As per
the forecast, price of direct material and variable overhead will be increased by 10% and 5%
respectively.

Marginal Costing 439

 Required to calculate:
(a) Number of units to be sold to maintain the same quantum of profit that made in March.
(b) Margin of safety in the month of March and April.
Ans. (a) 18,212 units; (b) `1,26,000; `1,63,902.44.

15. SK Ltd. is operating at 80 % capacity and presents the following information:

Break-even Sales `400 crores
P/V Ratio 30
Margin of Safety `120 crores
SK’s management has decided to increase production to 95 % capacity level with the following
modifications:
(a) The selling price will be reduced by 10 .
(b) The variable cost will be increased by 2 on sales
(c) The fixed costs will increase by `50 crores, including depreciation on additions, but excluding
interest on additional capital.
Additional capital of `100 crores will be needed for capital expenditure and working capital.
Required:
(i) Indicate the sales figure, with the working, that will be needed to earn `20 crores over and
above the present profit and also meet 15 interest on the additional capital.
(ii) What will be the revised
(a) Break-even Sales
(b) P/V Ratio
(c) Margin of Safety
Ans. (i) `86.71 crores; (ii) (a) `660.71 crores; (b) 28 ; (c) `200 crores.

16. SK Ltd. a chocolate and soft drink company is planning to establish a subsidiary company in India
to produce mineral water. Based on the estimated annual sales of 40,000 bottles of the mineral
water, cost studies produced the following estimates for the India subsidiary: [SM]

Total Annual Costs (`) Per cent of Total Annual

cost that is variable
Material 1,93,600 100%
Labour 90,000 70%
Overhead 80,000 64%
Administration 30,000 30%
The Indian production will be sold by manufacturer’s representatives who will receive a commission
of 8 per cent of the sale price. No portion of the British Office expenses is to be allocated to the
Indian subsidiary. It is required to:
(a) Compute the sale price per bottle to enable management to realize an estimated 10 per cent
profit on sale proceeds in India, and;
(b) Calculate the break-even point in rupee sales for the Indian subsidiary on the assumption
that the sale price is `11 per bottle.
Ans. (a) `12; (b) `3,84,000.
440 Cost and Management Accounting
17. SK Ltd. manufactures only pencils where the marginal cost of each pencil is `3. It has fixed costs
of `25,000 per annum. Present production and sales of pencils is 50,000 units and selling price
per pencil is `5. Any sale beyond 50,000 pencils is possible only if the company reduces 20% of
its current selling price.
However, the reduced price applies only to the additional units. The company wants a
target profit of `1,00,000. How many pencils must be produced and sold if the target is to
be achieved?
Ans. 75 pencils.

18. A dairy product company manufacturing baby food with a shelf life of one year furnishes the
following information:
(i) On 1st January, 2019, the company has an opening stock of 20,000 packets whose variable
cost is `180 per packet.
(ii) In 2018, production was 1,20,000 packets and the expected production in 2019 is 1,50,000
packets. Expected sales for 2019 is 1,60,000 packets.
(iii) In 2018, fixed cost per unit was `60 and it is expected to increase by 10 in 2019. The
variable cost is expected to increase by 25 . Selling price for 2019 has been fixed at `300
per packet.
ou are required to calculate the Break-even volume in units for 2019.
Ans. 93,600 units.

19. A company has a P/V ratio of 40 . Compute by what percentage must sales be increased to offset:
20% reduction in selling price? Also find the required change in sales quantity level. [SM]

20. [SM]
(a) ou are given the following data for the coming year for a factory:
Budgeted output 8,00,000 units
Fixed expenses `40,00,000
Variable expenses per unit `100
Selling price per unit `200
Draw a break-even chart showing the break-even point.
(b) If price is reduced to `180, what will be the new break-even point
Ans. (a) 40,000 units; (b) 50,000 units.

21. A company sells two products, S and K. The sales mix is 4 units of S and 3 units of K. The contribution
margins per unit are `40 for S and `20 for K. Fixed costs are `6,16,000 per month. Compute the
break-even point.
Ans. 11,200 units; 8,400 units.

Marginal Costing 441

22. CT Ltd. manufactures and sells a single product X whose selling price is `100 per unit and the
variable cost is `60 per unit. [SM]
(a) If the Fixed Costs for this year are `24,00,000 and the annual sales are at 60% margin of
safety, Calculate the rate of return on sales, assuming an income tax level of 40 .
(b) For the next year, it is proposed to add another product line whose selling price would
be `150 per unit and the variable cost `100 per unit. The total fixed costs are estimated at
`28,00,000. The sales mix of : would be 5 : 3. Compute the breakeven sales in units for
both the products.
Ans. (a) 14.40 ; (b) 40,000 units; 24,000 units.

23. Prepare a profit graph for products S, K and M and find break-even point from the following data:
Particulars S K M Total
Sales (`) 7,500 7,500 3,750 18,750
Variable cost (`) 1,500 5,250 4,500 11,250
Fixed cost (`) - - - 5,000

24. A, B and C are three similar plants under the same management who want them to be merged
for better operation. The details are as under:

Plant A B C
Capacity operated 100% 70% 50%
(`in lakhs) (`in lakhs) (`in lakhs)
Turnover 300 280 150
Variable cost 200 210 75
Fixed cost 70 50 62
Find out:
(a) the capacity of the merged plant for break-even
(b) the profit at 75 capacity of the merged plant
(c) the turnover from the merged plant to give a profit of `28 lakhs.
Ans. (a) 52 ; (B) `80,50,000; (c) `6,00,00,000.

25. A company can make any one of the 3 products , and in a year. It can exercise its option only
at the beginning of each year. Relevant information about the products for the next year is given
below: [SM]
X Y Z
Selling Price (`/ unit) 10 12 12
Variable costs (`/ unit) 6 9 7
Market Demand (unit) 3,000 2,000 1,000

442 Cost and Management Accounting

 X Y Z
Production capacity (unit) 2,000 3,000 900
Fixed costs (`) 30,000
Required to compute the opportunity costs for each of the products.
Ans. `60,000; `80,000; `80,000.

26. SK Ltd. has an annual production of 90,000 units for a component. The component cost structure
is as below:
Material `270 per unit
Labour (25 fixed) 180 per unit
Variable expenses 90 per unit
Fixed expenses 135 per unit
675 per unit
(a) The purchase manager has an offer from a supplier, who is willing to supply the component
at `540. Should the component be purchased and production stopped?
(b) Assume the resources now used for this component manufacture are to be used to produce
another new product for which the selling price is `485. In the latter case material price
will be `200 per unit. 90,000 units of this product can be produced at the same cost basis
as above for labour and other expenses. Discuss whether it would be advisable to direct the
resources to manufacture the new product, on the footing that the component presently
being produced would, instead of being produced, be purchased from the market.
Ans. (a) Manufacture; (b) Manufacture new product.

27. SK Ltd. manufactures three different products and the following information has been collected
from the books of accounts: [SM]
Products
S T U
Sales Mix 35% 35% 30%
Selling Price `300 `400 `200
Variable Cost `150 `200 `120
Total Fixed Costs `18,00,000
Total Sales `60,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of Product
U and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 50% 25% 25%
Selling Price `300 `400 `300

Marginal Costing 443

 Products
S T M
Variable Cost `150 `200 `150
Total Fixed Costs `18,00,000
Total Sales `64,00,000
Required:
(a) Compute the PV ratio, total contribution, profit and Break-even sales for the existing product
mix.
(b) Compute the PV ratio, total contribution, profit and Break-even sales for the proposed
product mix.
(c) State whether the proposed sales mix is accepted or not
Ans. (a) BES = `37,89,473.68; (b) BES = `36,00,000; (c) Accept.

28. The following particulars are obtained from costing records of a factory:

Product A Product B
Particulars
(per unit) (`) (per unit) (`)
Selling Price 400 1000
Material (`40 per litre) 80 320
Labour (`20 per hour) 100 200
Variable Overhead 40 80
Total fixed overheads = `30,000.
Comment on the profitability of each product when:
(a) Raw material is in short supply
(b) Production capacity is limited
(c) Sales quantity is limited
(d) Sales value is limited
(e) Only 1,000 litres of raw material is available for both the products in total and maximum
sales quantity of each product is 300 units.
Ans. (a) A; (b) B; (c) B; (d) A; (e) A = 300; B = 50.

29. SK Ltd. supplies spare parts to an air craft company MK Ltd. The production capacity of SK Ltd.
facilitates production of any one spare part for a particular period of time. The following are the
cost and other information for the production of the two different spare parts A and B: [SM]

Per unit Part A Part B

Alloy usage 1.6 Kg 1.6 Kg
Machine Time: Machine A 0.6 hrs. 0.25 hrs.
Per unit Part A Part B
Machine Time: Machine B 0.5 hrs. 0.55 hrs.

444 Cost and Management Accounting

 Per unit Part A Part B
Target Price (`) 145 115
Total hours available Machine A – 4,000 hours
Machine B – 4,500 hours
Alloy available is 13,000 kg `12.50 per kg
Variable overheads per machine hours: Machine A – `80
Machine B – `100
Required:
(a) Identify the spare part which will optimize contribution at the offered price.
(b) If MK Ltd. reduces target price by 10 and offers `60 per hour of unutilized machine hour,
what will be the total contribution from the spare part identified above
Ans. (a) A; (b) `1,53,328.

30. An agriculture based company having 210 hectares of land is engaged in growing three different
cereals namely, wheat, rice and maize annually. The yield of the different crops and their selling
prices are given below: [Nov 2022]
Wheat Rice Mazie
ield (in kgs per hectare) 2,000 500 100
Selling price (` per kg) 20 40 250
The variable cost data of different crops are given below:
all fig res in ` per kg)
Crop Labour charges Packaging Materials t er variable ex enses
Wheat 8 2 4
Rice 10 2 1
Maize 120 10 20
The company has a policy to produce and sell all the three kings of crops. The maximum and
minimum area to be cultivated for each crop is as follows:
Crop axi rea in ectares Minimum Area (in hectares)
Wheat 160 100
Rice 50 40
Maize 60 10
You are required to:
(a) Rank the crops on the basis of contribution per hectare
(b) Determine the optimum product mix considering that all the three cereals are to be produced.
(c) Calculate the maximum profit which can be achieved if the total fixed cost per annum is
`21,45,000.
(assume that there are no other constraints applicable to this company)
Ans. (a) II, I, III; (b) 50; 10; 150; (c) `4,30,000.

Marginal Costing 445

31. SK Ltd. manufactures medals for winners of athletic events and other contests. Its manufacturing
plant has the capacity to product 10,000 medals each month. The company has current production
and sales level of 7,500 medals per month. The current domestic market price of the medal is
`150. [SM]
The cost data for the month of August is as under:
(`)
Variable costs:
- Direct materials 2,62,500
- Direct labour costs 3,00,000
- Overhead 75,000
Fixed manufacturing costs 2,75,000
Fixed marketing costs 1,75,000
10,87,500

SK ltd. has received a special one-time order for 2,500 medals at `120 per medal. Required:
(a) Should SK ltd. accept the special order Why Explain briefly.
(b) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month. The
special order must be taken either in full or rejected totally. Analyse whether SK Ltd. should
accept the special order or not.
Ans. (a) Accept; (b) Accept.

32. The profit for the year of RJ Ltd. works out to 12.5 of the capital employed and the relevant
figures are as under:

Sales `5,00,000
Direct Materials `2,50,000
Direct Labour `1,00,000
Variable Overheads `40,000
Capital Employed `4,00,000

The new Sales Manager who has joined the company recently estimates for next year a profit
of about 23% on capital employed, provided the volume of sales is increased by 10% and
simultaneously there is an increase in Selling Price of 4% and an overall cost reduction in all the
elements of cost by 2%.
Required to find out by computing in detail the cost and profit for the next year, whether the
proposal of Sales Manager can be adopted.
Ans. Accept.

446 Cost and Management Accounting

33. The following are cost data for three alternative ways of processing the clerical work for cases
brought before the LC Court System: [SM]

A Manual (`) B Semi-Automatic (`) C lly to atic `)

Monthly fixed costs:
Occupancy 15,000 15,000 15,000
Maintenance contract - 5,000 10,000
Equipment lease - 25,000 1,00,000
Unit variable costs
(per report):
Supplies 40 80 20
Labour `200 `60 `20
(5 hrs × `40) (1 hr × `60) (0.25 hr × `80)
Required:
(a) Calculate cost indifference points. Interpret your results.
(b) If the present case load is 600 cases and it is expected to go up to 850 cases in near future,
select most appropriate on cost considerations?
Ans. (a) 300; 550; 800.

34. SK Ltd. makes two products S and K, whose respective fixed costs are F1 and F2. ou are given
that the unit contribution of K is one-fifth less than the unit contribution of S, that the total of F1
and F2 is `1,50,000, that the BEP of S is 1,800 units (for BEP of S, F2 is not considered) and that
3,000 units is the indifference point between S and K (i.e. S and K make equal profits at 3,000 units
volume, considering their respective fixed costs). There is no inventory build-up as whatever is
produced is sold. [SM]
Required to find out the values of F1 and F2 and units contributions of S and K.
Ans. F1 = `90,000; F2 = `60,000; Contr. X = `50; Contr. Y = `40.

35. SK Ltd. supplies you the following standard cost per unit for one of its products.
Direct material `1.60
Direct labour `1.50
Variable factory overhead `1.20
Fixed factory overhead `3.00
Production at normal capacity is 2,00,000 units. Variable selling and administrative overhead per
unit is `0.50 and fixed selling and administrative overhead were `75,000 per year. Production
and sales data for the year 2017 and year 2018 are as follows:
Units produced in year 2017 2,00,000
Units sold in year 2017 1,60,000
Inventory – 31st Dec. 2017 68,000

Marginal Costing 447

 Units produced in year 2018 1,50,000
Units sold in year 2018 1,80,000
Selling price in each year was `10.50. Prepare Income Statement for the two years under:
(i) Absorption costing, and (ii) Marginal costing
Ans. (i) `3,57,000; `2,61,000; (ii) `2,37,000; `3,51,000.

PRACTICE QUESTIONS
36. You are given the following information:
(i) Fixed cost `1,50,000
(ii) Variable cost `15 per unit
(iii) Selling price is `30 per unit
Calculate:
(a) Break-even point
(b) Sales to earn a profit of `20,000
Ans. (a) 10,000 units; (b) `3,40,000.

37. You are required to: [SM]

(a) Determine profit, when sales = `2,00,000
Fixed cost = `40,000
BEP = `1,60,000
(b) Determine sales, when fixed cost = `20,000
Profit = `10,000
BEP = `40,000
Ans. (a) `10,000; (b) `60,000.

38. You are given the following data: [SM]

Sales Profit
ear 2020-21 `1,20,000 8,000
ear 2021-22 `1,40,000 13,000
Find out:
(a) PV ratio
(b) B.E. point
(c) Profit when sales are `1,80,000
(d) Sales required to earn a profit of `1,20,000
(e) Margin of safety in year 2021-22.
Ans. (a) 25 ; (b) `88,000; (c) `23,000; (d) `1,36,000; (e) `52,000.

448 Cost and Management Accounting

39. The following information is given by SK Ltd: [SM]
Margin of Safety `1,87,500
Total cost `1,93,750
Margin of Safety 3,750 units
Break-even Sales 1,250 units
Required to calculate profit, P/V ratio, BEP Sales (in `) and Fixed cost.
Ans. `56,250; 30%; `62,500; `18,750.

40. A company had incurred fixed expenses of `4,50,000 with sales of `15,00,000 and earned a profit
of `3,00,000 during the first half year. In the second half, it suffered a loss of `1,50,000. [SM]
Calculate:
(i) The profit-volume ratio, break-even point and margin of safety for the first half year.
(ii) Expected sales volume for the second half year assuming that selling price and fixed expenses
remained unchanged during the second half year.
(iii) The break-even point and margin of safety for the whole year.
Ans. (i) 50 ; `9,00,000; `6,00,000; (ii) `6,00,000; (iii) `18,00,000; `3,00,000.

41. Mr. X has `2,00,000 investments in his business firm. He wants a 15 return on his money. From
an analysis of recent cost figures, he finds that his variable cost of operating is 60% of sales, his
fixed costs are `80,000 per year. Show computations to answer the following questions: [SM]
(i) What sales volume must be obtained to break even
(ii) What sales volume must be obtained to get 15 per cent return on investment
(iii) Mr. x estimates that even if he closed the doors of his business, he would incur `25,000 as
expenses per year. At what sales would be better off by locking his business up
Ans. (i) `2,00,000; (ii) `2,75,000; (iii) `1,37,500.

42. A company has fixed costs of `90,000, Sales `3,00,000 and profit of `60,000.
Required to compute:
(a) Sales volume if in the next period, the company suffered a loss of `30,000?
(b) What is the margin of safety for a profit of `90,000?
Ans. (a) 50 ; (B) `1,80,000.

43. A company earned a profit of `30,000 during the year. If the marginal cost and selling price of the
product are `8 and `10 per unit respectively, find out the amount of margin of safety. [SM]
Ans. 20%; `1,50,000.

44. [SM]
(a) If margin of safety is `2,40,000 (40 of sales) and P/V ratio is 30 of SK Ltd., calculate its
(1) Break even sales, and (2) Amount of profit on sales of `9,00,000,

Marginal Costing 449

 (b) SK Ltd. has earned a contribution of `2,00,000 and net profit of `1,50,000 of sales of
`8,00,000. What is its margin of safety?
Ans. (a) (1) `3,60,000; (2) `1,62,000; (b) `6,00,000.

45. During a particular period, ABC Ltd. has furnished the following data: [Jan 2021]
Sales `10,00,000
Contribution to sales ratio 37% and
Margin of safety is 25% of sales
A decrease in selling price and decrease in the fixed cost could change the “contribution to sales
ratio” to 30% and “margin of safety” to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost
(ii) Revised Sales and
(iii) New Break-Even Point
Ans. (i) `1,62,000; (ii) `9,00,000; (iii) `5,40,000.

46. A single product company sells its product at `60 per unit. In 2019-20, the company operated at
a margin of safety of 40 . The fixed costs amounted to `3,60,000 and the variable cost ratio to
sales was 80%. [SM]
In 2020-21, it is estimated that the variable cost will go up by 10 and the fixed cost will increase
by 5%.
(i) Find the selling price required to be fixed in 2020-21 to earn the same P/V ratio as in 2019-
20.
(ii) Assuming the same selling price of `60 per unit in 2020-21, find the number of units required
to be produced and sold to earn the same profit as in 2019-20.
Ans. (i) `66; (ii) 85,834 units.

47. An automobile manufacturing company produces different models of Cars. The budget in respect
of model 007 for the month of March is as under: [SM]
Budgeted Output 40,000 units
` in lakhs ` in lakhs
Net Realisation 2,10,000
Variable Costs:
Materials 79,200
Labour 15,600
Direct expenses 37,200 1,32,000
Specific fixed costs 27,000
Allocated Fixed costs 33,750 60,750
Total Costs 1,92,750
Profit 17,250
Sales 2,10,000

450 Cost and Management Accounting

 Calculate:
(i) Profit with 10 percent increase in selling price with a 10 percent reduction sales volume.
(ii) Volume to be achieved to maintain the original profit after a 10 percent rise in material costs,
at the originally budgeted selling price per unit.
Ans. (i) `28,350 lakhs; (ii) 44,521 units.

48. PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of 2,000 pieces.
The Cost Accountant has presented following information for the year to the management:
ay
Particulars Amount (`) Amount (`)
Sales 1,500 pieces `1,800 per piece 27,00,000
Direct Material 5,94,200
Direct Labour 4,42,600
Overheads (40 Fixed) 11,97,000 22,33,800
Net Profit 4,66,300
Evaluate following options:
(i) If selling price is increased by `200, the sales will come down to 60% of the total annual
capacity. Should the company increase its selling price?
(ii) The company can earn a profit of 20 on sales if the company provide TIEPIN with ready-
made suit. The cost of each TIEPIN is `18. Calculate the sales to earn a profit of 20 on sales.
Ans. (i) Accept; (ii) 1,900 units.

49. M/s Gaurav Private Limited is manufacturing and selling two products: ay
‘BLACK’ and ‘WHITE’ at selling price of `20 and `30 respectively.
The following sales strategy has been outlined for the financial year 2019-20:
(i) Sales planned for the year will be `81,00,000 in the case of ‘BLACK’ and `54,00,000 in the
case of ‘WHITE’.
(ii) The selling price of ‘BLACK’ will be reduced by 10 and that of ‘WHITE’ by 20 .
(iii) Break-even is planned at 70 of the total sales of each product.
(iv) Profit for the year to be maintained at `8,26,200 in the case of ‘BLACK’ and `745,200 in
the case of ‘WHITE’. This would be possible by reducing the present annual fixed cost of
`42,00,000 allocated as `22,00,000 to ‘BLACK’ and `20,00,000 to ‘WHITE’.
You are required to calculate:
(1) Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break even during the financial year
2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (iv)
above.
Ans. (1) 3,15,000; 2,25,000; (2) `2,72,200; `2,61,200.
Marginal Costing 451
50. A company manufactures two types of herbal product A and B. Its budget shows profit figures
after apportioning the fixed joint cost of `15 lacs in proportion of the numbers of units sold. The
budget for 2018, indicates: P ay
A B
Profit (`) 1,50,000 30,000
Selling price / unit (`) 200 120
P/V Ratio ( ) 40 50
Required:
Compute the best option among the following, if the company expects that the number of units
to be sold would be equal.
(a) Due to exchange in a manufacturing process, the joint fixed cost would be reduced by 15
and the variables would be increase by 7½%.
(b) Price of A could be increase by 20 as it is expected that the price elasticity of demand
would be unity over the range of price.
(c) Simultaneous introduction of both the option, viz. (a) and (b) above.
Ans. (a) `2,43,000; (b) `4,20,000; (c) `5,01,000.

51. You are given the following data for the current financial year of SK Ltd.: [SM]

Variable cost 60,000 60%

Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%
Find out (a) Break-even point; (b) PV Ratio; (c) Margin of safety. Also draw a break-even chart
showing contribution and profit.
Ans. (a) 40 ; (b) `75,000; (c) `25,000.

51. A company has three factories situated in north, east and south with its Head Office in Mumbai.
The management has received the following summary report on the operations of each factory
for a period: [SM]
Sales Profit
Actual ver nder Actual ver nder
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)

Calculate for each factory and for the company as a whole for the period:
(i) The fixed costs. (ii) break-even sales.
Ans. (i) 360; 660; 330; (ii) `800; `1,100; `600.

452 Cost and Management Accounting

53. Top-tech manufacturing company is presently evaluating two possible machines for the
manufacture of superior pen-drives. The following information is available: ay
Particulars Machine A Machine B
Selling price per unit `400.00 `400.00
Variable cost per unit `240.00 `260.00
Total fixed costs per year `350 lakhs `200 lakhs
Capacity (in units) 8,00,000 10,00,000
Required:
(i) Recommend which machine should be chosen
(ii) Would you change your answer, if you were informed that in near future demand will be
unlimited and the capacities of the two machines are as follows?
Machine A – 12,00,000 units
Machine B – 12,00,000 units
Why?

54. SK ltd. manufactures automobiles accessories and parts. The following are the total cost of
processing 2,00,000 units: [SM]
Direct material cost `375 per unit
Direct labour cost `80 per unit
Variable factory overhead `16 per unit
Fixed factory overhead `500 lakhs
The purchase price of the component is `485. The fixed overhead would continue to be incurred
even when the component is bought from outside. Required:
(a) Should be part be made or bought from outside considering that the present facility when
released following a buying decision would remain idle?
(b) In case the released capacity can be rented out to another manufacturer for `32,00,000
having good demand. What should be the decision?
Ans. (a) Manufacture; (b) buy from outside.

55. The product mix of SK Ltd. is as under: [SM

Product M Product N
Units 54,000 18,000
Selling price `7.50 `15.00
Variable cost `6.00 `4.50

Find the break-even point in units, if the company discontinues product ‘M’ and replace with
product ‘O’. the quantity of product ‘O’ is 9,000 units and its selling price and variable costs
respectively are `18 and `9. Fixed cost is `15,000.
Ans. BEP of N = 1,000; BEP of O = 500 units.
Marginal Costing 453
56. SK Ltd. produces products ‘ ’, ‘ ’ and ‘ ’ and has decided to analyse its production mix in respect
of these three products – ‘X’, ‘Y’ and ’Z’. [SM, Nov 2020]
You have the following information:
X Y Z
Direct materials ` (per unit) 160 120 80
Variable overheads ` (per unit) 8 20 12
Direct Labour:
Departments Rate per Hour Hours per unit Hours per unit Hours per unit
(`) X Y Z
Department A 4 6 10 5
Department B 8 6 15 11
From the current budget, further details are as below:
X Y Z
Annual production at present (in units) 10,000 12,000 20,000
Estimated selling price per unit (`) 312 400 240
Sales department estimate of possible sales in 12,000 16,000 24,000
the coming year (in units)
There is a constraint on supply of labour in Department-A and its manpower cannot be increased
beyond its present level. Required:
(i) Identify the best possible product mix of SK Ltd.
(ii) Calculate the total contribution form the best possible product mix.
Ans. (i) ; ; ; (ii) `28,48,000.

57. SK ltd. produces and sells two product x and . The product is highly demanded in the market.
Following information relating to both the products are given as under: [SM]
Per Unit (`)
X Y
Direct Materials 140 180
Direct Wages 60 100
Variable Overheads (`5 per machine hour) 20 40
Selling Price 300 450

The company is facing scarcity of machine hours for working. The availability of machine hours are
limited to 60,000 hours in a month. At present, the monthly demand of product X and product Y is
8,000 units and 6,000 units respectively. The fixed expenses of the company are `2,25,000 per month.
You are required to:
Determine the product mix that generates maximum profit to the company in the given situation
and also calculate the profit of the company.
Ans. Profit = `8.70,000.

454 Cost and Management Accounting

58. RPP Manufacturers is approached by an international customer for one-time special order similar
to one offered to its domestic customers. Per unit data for sales to regular customers is provided
below: [RTP Nov 2022]
Direct material `693
Direct labour `315
Variable manufacturing support `504
Fixed manufacturing support `1092
Total manufacturing costs `2604
Markup (50 ) `1302
Targeted selling price `3906
It is provided that RPP Manufactures has excess capacity.
Required:
(a) What is the full cost of the product per unit
(b) What is the contribution margin per unit
(c) Which costs are relevant for making the decision regarding this one-time special order
Why?
(d) For RPP Manufactures, what is the minimum acceptable price of this one-time-special order
only
(e) For this one-time-only special order, should RPP Manufactures considers a price of `2100
per unit? Why or why not?
Ans. (a) `2,604; (b) `2,394; (c) `1,512; (d) `1,512; (e) Accept.

59. LR Ltd. is considering two alternative methods to manufacture product it intends to market. The
two methods have a maximum output of 50,000 units each and produce identical items with a
selling price of `25 each. The costs are: ly
Method – I Method – II
Semi-Automatic (`) lly a to atic `)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000

You are required to calculate:

(i) Cost Indifference Point in units. Interpret your results.
(ii) The Break-even point of each method in terms of units
Ans. (i) 40,000 units; (ii) 10,000; 20,000.

60. SK Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned
as 90%. Standard variable production costs are `11 per unit. The fixed costs are `3,60,000 per
year. Variable selling costs are `3 per unit and fixed selling costs are `2,70,000 per year. The unit
selling price is `20. [SM]

Marginal Costing 455

 In the year just ended on 31stMarch, 2019, the production was 1,60,000 units and sales were
1,50,000 units. The closing inventory on 31st March was 20,000 units. The actual variable
production costs for the year were `35,000 higher than the standard.
(a) Calculate the profit for the year
(i) By absorption costing method and
(ii) By marginal costing method
(b) Explain the difference in the profits
Ans. (a) (i) 2,59,375; (ii) `2,39,375.

61. SK Ltd. manufactures a single product, SK. The following figures relate to SK for a one-year period.
[SM]
ctivity evel 50% 100%
Sales and production (units) 400 800
(`) (`)
Sales 8,00,000 16,00,000
Production costs:
- Variable 3,20,000 6,40,000
- Fixed 1,60,000 1,60,000
Selling and distribution costs:
- Variable 1,60,000 3,20,000
- Fixed 2,40,000 2,40,000

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout
the year, and actual fixed costs are the same as budgeted. There were no stocks of SK at the
beginning of the year.
In the first quarter, 220 units were produced and 160 units were sold. Required:
(a) Compute the fixed production costs absorbed by SK if absorption costing is used.
(b) Calculate the under/over recovery of overheads during this period
(c) Calculate the profit using absorption costing
(d) Calculate the profit using marginal costing
Ans. (a) `44,000; (b) `4,000; (c) `40,000; (d) `28,000.

456 Cost and Management Accounting

 SOLUTION OF PRACTICE QUESTIONS
36.
Fixed cost 1,50,000
(a) Break-even point (BEP) = = = 10,000 units
Contribution per unit 30 15

Contribution 30 15
(b) PV Ratio = ×100 = × 100 = 50%
Sales 30
Fixed cost+Required profit 1,50,000 20,000
Required sales = = = `3,40,000
PV Ratio 50%

37.

Fixed cost
(i) Break-even sales =
PV Ratio
40,000
1,60,000 =
PV Ratio
40,000
PV Ratio = = 0.25 = 25%
1,60,000
Profit = Contribution – Fixed cost = (2,00,000 25 ) 40,000 = `10,000
Fixed cost
(ii) Break-even sales =
PV Ratio
20,000
40,000 =
PV Ratio
20,000
PV Ratio = = 0.50 = 50%
40,000
Contribution = Fixed cost + Profit
(Sales 50 ) = 20,000 + 10,000
30,000
Sales = = `60,000
50%

38.
Change in Profit 13,000 8,000 5,000
(a) P/V Ratio = ×100 = × 100 = × 100 = 25%
Change in Sales 1,40,000 1,20,000 20,000
(b) Contribution for ear 2021-22 = 1,20,000 25
Fixed cost + Profit = 30,000
Fixed cost + 8,000 = 30,000
Fixed cost = `22,000
Fixed Cost 22,000
Break-even sales = = = `88,000
P/V Ratio 25%
Marginal Costing 457
 (c) Profit = Contribution – Fixed cost = (1,80,000 25 ) 22,000 = `23,000

Fixed Cost+Desired Profit 22,000 12,000

(d) Desired sales (in `) = = = `1,36,000
P/V Ratio 25%
(e) Margin of Safety = Actual sale – Break-even sales = 1,40,000 – 88,000 = `52,000

MOS units 3,750

39. Margin of safety ( ) = ×100 = × 100 = 75%
Totla units 3,750 1,250

MOS 1,87,500
Total sales = = = `2,50,000
MOS % 75%
Profit = Sales – Total cost = 2,50,000 – 1,93,750 = `56,250

Profit 56,250
PV Ratio = ×100 = × 100 = 30%
MOS × 1,87,500

Break-even sales = Total sales Breakeven sales = 2,50,000 (100 MOS ) = 2,50,000 0.25
= `62,500
Fixed cost = Contribution – Profit = (2,50,000 30 ) 56,250 = `18,750

40.
(i) In the First half year
Contribution = Fixed cost + profit = 4,50,000+3,00,000 = `7,50,000

C 7,50,000
P/V ratio = 50%
S 15,00,000

Fixed cost - Loss 4,50,000

Break-even point = = = `9,00,000
P/V rotio 50%
Margin of safety = Actual sales – Break-even point = 15,00,000 – 9,00,000 = `6,00,000
(ii) In the second half year
Contribution = Fixed cost - loss = 4,50,000 – 1,50,000 = `3,00,000

Fixed cost - loss 3,00,000

Expected sales volume = = = `6,00,000
P/V rotio 50%
(iii) For the whole year

Fixed Cost 4,50,000×2

B.E point = = = `18,00,000
P/V ratio 50%
Profit 30,00,000-1,50,000
Margin of safety = = = `3,00,000
P/V ratio 50%

458 Cost and Management Accounting

41. P/V ratio = 100 – 60 = 40

F 80,000
(i) B.E. Point = = = `2,00,000
P/V ratio 40%
(ii) Return of 15% on `2,00,000 = `30,000
Add: Fixed cost 80,000
Contribution required 1,10,000

F P 1,10,000
Sales required = = = `2,75,000
P / V ratio 40%
(iii) When business in lock
Fixed cost `25,000

Avoidable FC 80,000 25,000

Minimum sales = = = `1,37,500
PV Ratio 40%
Thus Mr. S will be better off if sales are more than `1,37,500.
42.
Fixed Cost+Profit 90,000 60,000
(a) P/V Ratio = ×100 = 100 = 50
Sales 3,00,000
Fixed Cost+Desired Profit
Desired sales (in `) = ×100
P/V Ratio
90,000 30,000
= 100 = `1,20,000
50%
Profit 90,000
(b) Margin of safety = = = `1,80,000
P/V Ratio 50%

Contribution 10 8
43. PV Ratio = ×100 = × 100 = 20%
Selling price 10
Profit 30,000
Margin of safety = = = `1,50,000
PV Ratio 20%

44.
(a) (1) Margin of safety = 40 of sales
2,40,000 = 40% of sales
Sales = 2,40,000 ÷ 40% = `6,00,000
Break-even sales = Sales – Margin of Safety = 6,00,000 – 2,40,000 = `3,60,000

Fixed Cost
(2) Break-even sales =
P/V Ratio
Marginal Costing 459
 Fixed Cost
3,60,000 =
30%
Fixed Cost = `1,08,000
Given Sales = `9,00,000
Profit = Contribution – Fixed Cost = (9,00,000 30 ) – 1,08,000 = `1,62,000

contribution 2,00,000
(b) PV Ratio = ×100 = × 100 = 25%
Sales 8,00,000
Profit 1,50,000
Margin of safety = = = `6,00,000
PV Ratio 25%

45. Existing variable cost ratio = 100 – Contribution to sales ratio = 100 – 37 = 63
Existing variable cost = 10,00,000 63 = `6,30,000
New variable cost = Existing variable cost = `6,30,000
New variable cost ratio = 100 – 30% = 70%
6,30,000
New sales = = `9,00,000
70%
New Margin of safety = 9,00,000 40 = `3,60,000
New Break-even point = 9,00,000 – 3,60,000 = `5,40,000
New Fixed cost = New Break-even point PV Ratio = 5,40,000 30 = `1,62,000

46.
(i) Contribution per unit = Sale price – VC per unit = 60 – (60 80 ) = `12
Contribution per unit 12
P/V Ratio = ×100 = × 100 = 20%
Selling price per unit 60
Fixed Cost 3,60,000
BEP = = = 30,000 units
Contribution per unit 12
Margin of safety is 40 . Therefore, break-even sales will be 60 of units sold.
No. of units sold = BEP (in units) 60 = 30,000 60 = 50,000 units
Profit earned (in year 2010) = Total contribution – Fixed cost = (50,000 12) – 3,60,000 =
`2,40,000
Revised variable cost = `48 + 10% = `52.80
Revised fixed cost = `3,60,000 + 5% = `3,78,000
Required P/V ratio (same as of 2018) = 20
Thus, variable cost ratio = 100 – 20% = 80%
Revised selling price = `52.80 ÷ 80% = `66
(ii) Required sales volume (for year 2019)
Fixed cost +desired profit 3,78,000 + 2,40,000
= = =85,834 units
Contribution per unit 60 - 52.80

460 Cost and Management Accounting

47.
2,10,000 lakhs
(i) Budgeted selling price = = `5,25,000 per unit
40,000 units
1,32,000 lakhs
Budgeted variable cost = = `3,30,000 per unit
40,000 units
Increased selling price = `5,25,000 +10% = `5,77,500 per unit
New volume = 40,000 – 10% = 36,000 units
tate ent of Calc lation of Profit
Particulars (` in lakhs)
Sales (36,000 units `5,77,500) 2,07,900
Less: Variable cost (36,000 units `3,30,000) 1,18,800
Contribution 89,100
Less: Fixed costs 60,750
Profit 28,350
(ii) Budgeted Material cost = 79,200 lakhs 40,000 units = `1,98,000 per unit

Particulars (` in lakhs)
Increased material cost (1,98,000 + 10 ) 2,17,800
Labour cost (15,600 lakhs 40,000 units) 39,000
Direct expenses (37,200 lakhs 40,000 units) 93,000
Variable cost per unit 3,49,800
Budgeted selling price per unti 5,25,000
Contribution per unit (5,25,000 – 3,49,800) 1,75,200

fixed cost+Profit 60,750 lakhs+17,250 lakhs

Sales volume = = = 44,521 units
contribution per unit 1.752 lakhs

48.
(i) Evaluation of option (i)
New Selling price = 1,800 + 200 = `2,000
New Sales uantity = 2,000 60 = 1,200 Pieces
Particulars Amount (`)
Sales (1,200 `2,000) 24,00,000
5,94,200 4,75,360
Less: Direct Material × 1,200
1,500
4,42,600 3,54,080
Less: Direct Labour × 1,200
1,500
11,97,000 × 60% 5,74,560
Less: Variable Overheads × 1,200
1,500

Marginal Costing 461

 Particulars Amount (`)
Contribution 9,96,000
Less: Fixed Costs (11,97,000 40 ) 4,78,000
Profit 5,17,200
If the price is increased by `200 than quantity is reducing by 20 (300 on 1,500). Through this
step, the profit of the firm will rise by `50,900 from the existing level. Since there is increase in
profit, thus it may be recommended to accept this policy.
(ii) Evaluation of option (ii)
Calculation of P/V Ratio
Selling price per unit 1,800.00
5,94,200
Less: Direct material per unit 396.13
1,500
Less: cost of Tie pin 18.00
4,42,600
Less: Direct labour per unit 295.07
1,500
11,97,000 × 60%
Less: Variable Overheads 478.80
1,500
Contribution 612.00
612
P/V Ratio = × 100 = 34%
1,800
Let sales required to earn profit of 20 =y
Fixed Cost+Desired Profit
Desired sales =
P/V Ratio
4,78,800 0.20 y
y=
34%
0.34y = 4,78,800 + 0.2y
y = `34,20,000
Thus, sales required to earn a profit of 20 on sales = R.s 34,20,000
34,20,000
Sales units required to earn a profit of 20 of sales = = 1,900 units
1,800

49.
(i) Statement showing Break Even Sales
Particulars BLACK WHITE
Sales Planned (in `) 81,00,000 54,00,000
Break-even sales 70% 70%
Break-even sales (in `) (A) 56,70,000 37,80,000
Selling price per unit (in `) (B) 18 24
Break-even sales (in units) (A B) 3,15,000 2,25,000

462 Cost and Management Accounting

 ii tate ent o ing ixed Cost ed ction
Particulars BLACK WHITE
Profit to be maintained (`) (A) 8,26,200 7,45,200
Margin of Safety (30 Sales) (B) 24,30,000 16,20,000
P/V Ratio (A B) 34% 46%
Desired Contribution (Sales P/V Ratio) 27,54,000 24,84,000
Less: Desired Profit 8,26,200 7,45,200
Target Fixed Cost 19,27,800 17,38,800
Present Fixed Cost 22,00,000 20,00,000
Required reduction in fixed cost 2,72,200 2,61,200
50.
Working Notes:
1) Contribution per unit of A = 200 40 = `80
Variable cost per unit of A = 200 – 80 = `120
Contribution per unit of B = 120 50 = `60
Variable cost per unit of A = 120 – 60 = `60
2) Let units sold of A & B = y
Contribution = Fixed cost + Profit
80y + 60y = 15,00,000 + 1,50,000 + 30,000
140y = 16,80,000
y = 12,000
Units sold of each product = 12,000
a tate ent of Profit
Particulars Amount (`)
Contribution of A 200 – (120 + 7.5 ) 12,000 8,52,000
Contribution of B 120 – (60 + 7.5 ) 12,000 6,66,000
Total contribution 15,18,000
Less: Fixed Cost (15,00,000 – 15 ) 12,75,000
Profit 2,43,000
(b) Existing total sales of A = 12,000 200 = `24,00,000
New Selling price of A = 200 + 20% = `240
New quantity of A = 24,00,000 ÷ 240 = 10,000 units
tate ent of Profit
Particulars Amount (`)
Contribution of A (240 – 120) 10,000 12,00,000
Contribution of B (120 – 60) 12,000 7,20,000
Total contribution 19,20,000
Less: Fixed Cost 15,00,000
Profit 4,20,000

Marginal Costing 463

 c tate ent of Profit
Particulars Amount (`)
Contribution of A 240 – (120 + 7.5 ) 10,000 11,10,000
Contribution of B 120 – (60 + 7.5 ) 12,000 6,66,000
Total contribution 17,76,000
Less: Fixed Cost (15,00,000 – 15 ) 12,75,000
Profit 5,01,000
A comparison of increase in profit figures under above three options clearly indicates that the
option (c) is the best as it has the highest profit of `5,01,000.

` 1,00,000 ` 60,000
51. P/V Ratio = 40%
` 1,00,000

Total fixed cost 30,000

Break Even Point = = = `75,000
P/V Ratio 40%
Margin of safety = 1,00,000 – 75,000 = `25,000

52.
North East South
Sales Profit Sales Profit Sales Profit
Actual 1,100 135 1,450 210 1,200 330
Add: Under/(Over)
budgeted 400 180 (150) (90) 200 110
Budget 1,500 315 1,300 120 1,400 440
P/V Ratio 315 135 120 210
Difference in Profit × 100 × 100 440 330
1500 1100 1450 1300 × 100 =55%
Difference in Sales =45% =60% 1400 1200

464 Cost and Management Accounting

 North East South
Fixed cost (1100 45 ) – 135 (1450 60 ) – (1200 55 ) – 330 =
(Sales P/v) -Profit = 360 210 = 660 330
B.E. Sales
Fixed cost 360 660 330
= `800 = `1,100 = `600
P/V ratio 45% 60% 55%

53.
i tate ent of Profit
Particulars Machine A Machine B
Contribution per unit (`) 400 – 240 = 160 400 – 260 = 140
Capacity (units) 8 lakhs 10 lakhs
Total contribution (`) 1,280 lakhs 1,400 lakhs
Less: Fixed cost (`) 350 lakhs 200 lakhs
Profit 930 lakhs 1,200 lakhs
Machine B should be chosen as it gives more profit than Machine A.
ii tate ent of Profit
Particulars Machine A Machine B
Contribution per unit (`) 400 – 240 = 160 400 – 260 = 140
Capacity (units) 12 lakhs 12 lakhs
Total contribution (`) 1,920 lakhs 1,680 lakhs
Less: Fixed cost (`) 350 lakhs 200 lakhs
Profit 1,570 lakhs 1,480 lakhs
Machine A should be chosen as it gives more profit than Machine B.

54.
(a) The decision shall be made comparing the marginal cost of making and buying the component.
Here the variable cost of making the component is `471 as compared to buying cost of `485.
The component shall be made by suing own production facility as it would save the company
`14 per unit.
(b) If by releasing the production facility the company can earn a rental income of `32,00,000,
then the additional cost of buying from outside and the rental income from releasing the
capacity shall be compared for making decision.
Additional cost of buying = `14 2,00,000 units = `28,00,000
Rental income to be received = `32,00,000
Additional benefit = `4,00,000
The component should be bought from outside as it would save the company `4,00,000 in
fixed cost.

Marginal Costing 465

 Total contribution 18 9 9000 15 4.50 18000
55. Overall contribution per unit = = = `10
Total units 27000
Fixed cost 15,000
Overall BEP = = = 1,500 units
Overall contribution per unit 10
9000
BEP of O = 1,500 = 500 units
27,000
18000
BEP of N = 1,500 = 1,000 units
27,000

56.
(i) Statement of Contribution per unit and Ranking
Particulars X (`) Y (`) Z (`)
Selling price (A) 312 400 240
(-) Direct material 160 120 80
(-) Direct labour of Dept. A 24 40 20
(-) Direct labour of Dept. B 48 120 88
(-) Variable overheads 8 20 12
Contribution per unit 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Ranking I II III
b tate ent of Prod ct ix and Profit

Product Units Hours per unit Material consumed Contribution

X 12,000 6 72,000 12,000 72 = 8,64,000
Y 16,000 10 1,60,000 16,000 100 =
16,00,000
Z 48,000÷5 = 5 (Bal. fig.) 48,000 2,400 45 = 1,08,000
9,600
37,600 2,80,000 28,48,000

57.
Statement of Contribution per unit and Ranking
Particulars X (`) Y (`)
Selling price 300 450
(-) Direct material 140 180
(-) Direct wages 60 100
(-) Variable overheads 20 40

466 Cost and Management Accounting

 Particulars X (`) Y (`)
Contribution per unit 80 130
Machine hours per unit 4 8
Contribution per machine hour 20 16.25
Ranking I II
Statement of Product Mix and Profit
Product Units Machine hour Material consumed Contribution
per unit
X 8,000 4 32,000 8,000 80 = 6,40,000
Y 28,000÷8 = 8 (Bal. fig.) 28,000 3,500 130 = 4,55,000
3,500
11,500 60,000 10,95,000
(-) Fixed Cost 2,25,000
Profit 8,70,000

58.
(a) Full cost of the product per unit = `2,604
(b) Selling price `3,906
(-) Direct material `693
(-) Direct labour `315
(-) Variable support cost `504
Contribution per unit `2,394
(c) Costs for decision making are those costs that differ between alternatives, which in this
situation are the incremental costs.
Direct material `693
Direct labour `315
Variable support cost `504
Total incremental costs `1,512
(d) Minimum acceptable price would be the incremental costs in the short term i.e. `1,512
(e) es, RPP Manufactures may consider a price of `2100 per unit because this price is greater
than the minimum acceptable price.

59.
(i) Let cost indifference units = y
Thus, Total cost of Method – I = Total cost of Method – II
1,00,000 + 15y = 3,00,000 + 10y
5y = 2,00,000
y = 40,000

Marginal Costing 467

 At y = 40,000 units, cost of the two methods will be equal.
If quantity produced is more than 40,000 units than option where variable cost per unit is
low i.e. Method - II will have greater benefits in term of cost. If quantity produced is less than
40,000 units than option with lowest fixed cost i.e. Method – I will have greater benefits in
terms of total cost.
(ii) Statement of Break-even point
Particulars Method – I Method - II
Contribution per unit (A) 25 – 15 = 10 25 – 10 = 15
Fixed cost (B) 1,00,000 3,00,000
Break-even point (in units) (B A) 10,000 20,000

60.
Working Note:
Particulars Year 2019
Opening stock (Bal. fig.) 10,000
(+) Production 1,60,000
(-) Sales 1,50,000
Closing Stock 20,000

(a) Income Statement under Absorption Costing

Particulars Amount
Sales (A) 1,50,000 20 = 30,00,000
Variable Production Cost 1,60,000 11 = 17,60,000
Under Recovered Variable Prod. Cost 35,000
Fixed Production 3,60,000
1,60,000 = 3,20,000
2,00,000 × 90%
GFC/NFC/COP 21,15,000
(+) Op. Stock FG 10,000 (11 + 2) = 1,30,000
(-) Cl. Stock FG 21,15,000
20,000 = 2,64,375
1,60,000
COGS 19,80,625
(+) Variable Selling Cost 1,50,000 3 = 4,50,000
(+) Fixed Selling Cost 2,70,000
COS 27,00,625
(+) Under Recovered Fixed Prod. Cost 3,60,000 – 3,20,000 = 40,000
Total Cost (B) 27,40,625
Profit (A – B) 2,59,375

468 Cost and Management Accounting

 Income Statement under Marginal Costing
Particulars Year 2019
Sales (A) 1,50,000 20 = 30,00,000
Variable Production Cost 1,60,000 11 = 17,60,000
Under recovered variable Prod. Cost 35,000
Variable GFC/NFC/COP 17,95,000
(+) Op. Stock FG 10,000 11 = 1,10,000
(-) Cl. Stock FG 17,95,000
20,000 = 2,24,375
1,60,000
Variable COGS (B) 16,80,625
(+) Variable Selling cost 1,50,000 3 = 4,50,000
Variable COS (B) 21,30,625
Contribution (A – B) 8,69,375
(-) Fixed Production Cost 3,60,000
(-) Fixed Selling Cost 2,70,000
Profit 2,39,375
(b) The reasons for difference in profit are:

Particulars Year 2019

Profit as per absorption costing 2,59,375
Add: Opening stock under-valued (1,30,000 – 1,10,000) 20,000
Less: Closing stock under-valued (2,64,375 – 2,24,375) (40,000)
Profit as per marginal costing 2,39,375

61.
(a) Budgeted fixed production costs = `1,60,000
Budgeted overheads 1,60,00
Recovery rate = = = `200 per unit
Normal level of activity 800
Fixed overheads absorbed = 220 units `200 = `44,000
(b) Actual production overheads = `40,000
Fixed overheads recovered = `44,000
Over recovered overheads = 44,000 – 40,000 = `4,000
(c) Profit state ent as er bsor tion Costing
Particulars `
Sales revenue (160 units `2,000) (A) 3,20,000
Variable cost (220 units `800) 1,76,000
Fixed overheads recovered (220 units `220) 44,000
Total production cost 2,20,000

Marginal Costing 469

 Particulars `
Add: Opening stock -
2,20,000 (60,000)
Less: Closing stock × 60
220

Cost of goods sold 1,60,000

Less: Adjustment for over recovery of fixed overheads (4,000)
Add: Variable selling & distribution overheads (160 `400) 64,000
Add: Fixed selling & distribution overheads (2,40,000 ) 60,000
Cost of Sales (B) 2,80,000
Profit (A – B) 40,000
d Profit state ent as er arginal Costing

Particulars `
Sales revenue (160 units `2,000) (A) 3,20,000
Variable cost (220 units `800) 1,76,000
Variable production cost 1,76,000
Add: Opening stock -
1,76,000 (48,000)
Less: Closing stock × 60
220

Variable cost of goods sold 1,28,000

Add: Variable selling & distribution overheads (160 `400) 64,000
Variable cost of sales (B) 1,92,000
Contribution (A – B) 1,28,000
Less: Fixed production cost (40,000)
Less: Fixed selling & distribution cost (60,000)
Profit 28,000



470 Cost and Management Accounting