3. Marginal Costing and Cost-Volume-Profit (CVP) Analysis

 

3.1 Marginal Costing

  • Definition: Marginal costing is an accounting approach where only variable costs are considered in product costing and decision-making.
  • Importance: Helps in making short-term decisions as fixed costs are not included in cost per unit calculations.

3.2 Contribution Margin

  • Formula: Contribution Margin = Sales - Variable Cost
  • Significance: It measures the amount available to cover fixed costs and contribute to profit.

3.3 Break-even Analysis

  • Break-even Point: The level of sales at which total revenue equals total costs, resulting in zero profit.
  • Formula: 
    Break-even Point=Fixed CostsContribution Margin per Unit\text{Break-even Point} = \frac{\text{Fixed Costs}}{\text{Contribution Margin per Unit}}
  • Solved Example:
    • Problem: A company’s fixed costs are $50,000, the selling price per unit is $20, and the variable cost per unit is $12. Find the break-even point in units.
    • Solution: Contribution Margin per Unit = $20 - $12 = $8
      • Break-even Point = $50,000 / $8 = 6,250 units.

3.4 Cost-Volume-Profit Analysis

  • Key Concepts:
    • Contribution Margin Ratio: (Contribution Margin / Sales) * 100
    • Margin of Safety: The excess of actual sales over the break-even sales.
    • Profit Volume Ratio: Contribution Margin / Sales
  • Solved Example:
    • Problem: If sales are $200,000 and variable costs are $120,000, calculate the contribution margin ratio.
    • Solution: Contribution Margin = $200,000 - $120,000 = $80,000
      • Contribution Margin Ratio = ($80,000 / $200,000) * 100 = 40%

Comments

Post a Comment

Popular posts from this blog

Introduction to Accounting: Basics and Examples

 1. Basics of Accounting Key Terms and Definitions Assets : Resources owned by a business (e.g., cash, inventory, buildings). Example : If a company buys a car for its operations, the car is considered an asset. Liabilities : What the business owes (e.g., loans, accounts payable). Example : A bank loan taken to purchase new machinery is a liability. Income : Money earned by the business from its operations (e.g., sales revenue). Example : If a store sells products worth ₹10,000, that amount is income. Expenses : Costs incurred by the business (e.g., rent, salaries). Example : Monthly rent of ₹5,000 for office space is an expense. GAAP (Generally Accepted Accounting Principles) : A set of rules and standards used in accounting to ensure consistency and transparency. Financial Accounting vs. Cost Accounting vs. Management Accounting Financial Accounting : Focuses on creating financial statements for external users. Cost Accounting : Analyzes costs related to production to help contro...
Read more

Attitude: Factors Influencing Formation of Attitude

Image
  Introduction: Attitude plays a crucial role in how we perceive, feel, and respond to the world around us. Whether it's our approach toward work, relationships, or society, our attitudes help define who we are. In this blog post, we’ll explore the main factors influencing attitude formation, using clear explanations and relatable examples. What is Attitude? An attitude is essentially a way of thinking or feeling about someone or something, often shown in our behavior. For example, if someone loves nature, they might have a positive attitude toward recycling and conservation. Factors Affecting the Formation of Attitude There are various factors that contribute to how our attitudes are formed. Let’s go through the main ones: 1. Direct Experience Personal experiences are powerful in shaping attitudes. A strong, memorable experience—positive or negative—can have a lasting effect on our perspective. Example: A person who had a great vacation at a beach resort may develop a positive a...
Read more

Organization Behaviour: An overview

Image
  Topic: 1 Organization Behaviour: An overview Introduction: Meaning : Study that investigates the impact that individuals, groups and structure have on behavior within an organization, then applies that knowledge to make organizations work more effectively. Definition : According to Luthans, “Organisational Behaviour is directly concerned with the understanding, prediction and control of human behaviour in the organisation.” According to Robbins, “Organisational Behaviour is a field of study that investigates the impact that individuals, groups and structure have on behaviour within organisation for the purpose of applying such knowledge towards improving an organisation’s effectiveness.” Features:   OB is the study of human behaviour Behaviour in organisations Knowledge about human behaviour would be useful in improving an organisation’s effectiveness Importance :  OB provides a road map to our lives in organisations.  The field of OB uses scientific research to he...
Read more