Marginal Costing

1. Marginal Costing • X Ltd. Furnished you the following related to the year 1996 First Half Second Half Sales 45,000 50,000 Total Cost 40,000 43,000 Assume that there is no change in prices and variable cost and that the fixed expenses are incurred equally in the 2nd half year Period. Calculate for the year 1996. • The Profit Volume Ratio • Fixed Expenses • Break Even Sales and d) % of margin of safety

2. Marginal Costing Solution: First Half Second Half Change in Sale and Profit Sales 45,000 50,000 5,000 Less: Cost 40,000 43,000 3,000 ------------------------------------------------------- Profit 5,000 7,000 2,000 -------------------------------------------------------- Change in Profit • P/V Ratio = --------------------------- X 100 Change in Sales

3. Marginal Costing 7,000-5,000 2,000 P/v Ratio = --------------------- X100 = ------------- X 100 = 40% 50,000 – 45,000 5,000 Contribution = Sales X P/V Ratio During the first Half = 45,000X 40% = Rs.18,000 Fixed Cost = Contribution – Profit For the first half = 18,000 -5,000 = 13,000 Fixed cost for the full year = 13,000x2 =26,000

4. Marginal Costing Fixed Cost Break Even Sale for the year 1996 = -------------------- P/V Ratio 26,000 BEP for the year 1996 = ------------ = Rs.65,000 40% Margin of Safety for the year 1996 = Sales – Break Even Sales = 95,000 – 65,000 = Rs 30,000 Margin of Safety Percentage of Margin of Safety = ---------------------- x 100 Sales for the year

5. Marginal Costing 30,000 Percentage of margin of Safety = ----------- X 100 = 31.58% 95,000 Note: • Since fixed expenses are incurred equally in the 2nd half years Rs.13,000 is multiplied with 2 to get fixed cost of the full year. 2. Sales of both 1st and 2nd half years are added and are taken as actual sales i.e., Rs.95,000 to calculate margin of safety.