Managerial Accounting - First Lecture

Syllabus for Managerial Accounting

• Marginal Costing
• Application of marginal Costing
• Relevant Costing
• Target Costing
• Cost control & cost reduction
• Standard Costing
• Budgets
• Responsibility Costing
• Efficiency Costing
• Activity based Costing
Lecture – 1
Marginal Costing

• Techniques of the costing
• Methods of Costing

o Constructing Costing – Contract Costing
o Assemblers – Job Costing
o Petroleum – Process Costing
o Service Costing – Operating costing


Absorption Costing / Marginal Costing / Standard Costing
Absorption – How much cost is absorbed by the product? eg 200/10 – 20
Marginal Costing – The cost of production of the extra marginal product.
A Technique of ascertaining cost of one extra unit.

1) Contribution -  Amount of sales over its variable cost

Formulae = Sales – Variable cost

2) Profit Volume ration – profitability

Profitability – Contribution / sales x 100


3) Breakeven point ( Sales ) – A situation where the com[any earns no profit neither suffers a loss.
In units = Fixed cost / Contribution per unit
In Rupees = Fixed Cost / Profit Volume ration ( P.V Ratio)

4) Margin of safety – Amount of sales over breakeven point

= Sales – Breakeven point
=  S – F.C/PVR
=( ( S x PVR ) – F.C)/PVR
= ((Contribution – F.C))/PVR
= Profit / PVR
5) Profit = ( Sales – Variable Cost ) – Fixed Cost

 Fixed Cost – Element of cost which remains same irrespective of the change in the level of    production
It remains same in total but changes in per unit
Variable Cost – An element of cost which changes according to the change in the level of production
It changes in total but remains same in per unit.
• Contribution and PV ratio are one and same the only difference is contribution is expressed in monetary terms and PV ratio in percentage .

• To get answer in unit contribution per unit is used , if in the same formulae contribution is replaced by PV ratio answer will be in Rs .



Question No – 1
Sales – 20000 units @ Rs 20 per unit
Variable cost – Rs 12 / unit
Fixed cost – 60000
Calculate
Solution
Contribution = Sales – Variable cost
= 20 – 12
= 8 Rs
  PV Ratio       =   C/S x 100
= 8/20 x 100
=    40 %
Breakeven point = Fixed cost / P V Ratio
   = 60000/40 %
    = Rs 150000
Units = 60000/8 = 7500
Margin of safety = Sales – Break Even point
  = (20 x 20000) – 150000
  = Rs 2, 50,000
IN units = 20000 – 7500 = 12,5000
           Profit = Contribution – Fixed Cost
= (8 x 20000) - 60000
= 100000



Question number – 2
Variable cost = Rs 25 / unit
Production – 100000 unit
Sales price = Rs 70 /unit
Fixed cost = Rs 20 lacs
Solution
Contribution = Sales – Variable cost
= 70 – 25
= 45 Rs
  PV Ratio       =   C/S x 100
= 45/70 x 100
=    64.2 %
Breakeven point = Fixed cost / P V Ratio
   = 2000000 /64.2 %
    = Rs 3111111
Units = 2000000 / 45 = 444444 (fixed cost /contribution)
Margin of safety = Sales – Break Even point
  = (70 x 100000) – 3111111
  = Rs 3888889
IN units = 100000 – 44444 = 55555
           Profit = Contribution – Fixed Cost
= (45x 100000) - 2000000
= 2500000



Question – 3

Sales = Rs 45 / unit
Sales unit = 10000
Variable cost = Rs 15 /unit
Fixed cost = Rs 100000

Calculate –
• what will be the amount of profit if VC increased by Rs 5 /unit
• what will the amount of breakeven point if fixed cost is increased by Rs 25000/-

Solution

Contribution = Sales – Variable cost
= 45 – 15
= 30 Rs

  PV Ratio       =   C/S x 100
= 30/45 x 100
=    66.6 %

Breakeven point = Fixed cost / P V Ratio
   = 100000 /66.6 %
    = Rs 151515

Units = 100000 / 30 = 3333 (fixed cost /contribution)

Margin of safety = Sales – Break Even point
  = (45 x 10000) – 151515
  = Rs 298485

IN units = 10000 – 3333 = 6667

           Profit = Contribution – Fixed Cost
= (30x 10000) - 100000
= 200000

IF VC INCREASED Rs 5
Profit = Contribution – Fixed Cost
= (25 x 10000) - 100000
= 150000
what will the amount of breakeven point if fixed cost is increased by Rs 25000/-

Breakeven point = Fixed cost / P V Ratio
   = 125000 /66.6 %
    = Rs 189393
UNits = 125000 / 30 = 4167 (fixed cost /contribution)
 
Question – 4
Variable cost – Rs 90000
Fixed Cost – Rs 150000
Profit -  Rs 26/unit
Sales unit – 10000
Calculate
• Contribution
• PV ratio
• BEP
• Margin of safety
• What will be the amount of profit if variable cost is decreased by 10 %
• What will is the amount of profit if fixed cost is increased by 10 %
• What will be the margin of safety if fixed cost and variable cost decrease by 5 % and 10 % respectively
Note – changes in variable cost to be calculated in per unit and that of fixed cost to be calculated in total
Solution

Contribution = Profit + FC
= 26 + 15 ( fixed cost per unit )
= 41 Rs

  PV Ratio       =   C/S x 100
=  41/50  x 100 ( sales = contribution + Variable cost /unit)
=    82 %

Breakeven point = Fixed cost / P V Ratio
   = 150000 /82 %
    = Rs 182926

Units = 150000 / 41 = 3658 (fixed cost /contribution)

Margin of safety = Sales – Break Even point
  = (50 x 10000) – 182926
  = Rs 317074

IN units = 10000 – 3658= 6342

What will be the amount of profit if variable cost is decreased by 10 %        

           Profit = (sales – variable cost)  – Fixed Cost
= ((50 – ( 0.9 x 9) x 10000) - 100000
= 269000

What will is the amount of profit if fixed cost is increased by 10 %
Profit = (sales – variable cost)  – Fixed Cost
= ((50 – 9) x 10000) – (150000 x 1.10)
= 245000
What will be the margin of safety if fixed cost and variable cost decrease by 5 % and 10 % respectively
Contribution = Profit + FC
= 27.65 + 14.25 ( fixed cost per unit )
= 41.9 Rs

  PV Ratio      =   C/S x 100
  = 41.9/50 x 100 ( sales = contribution + Variable cost /unit)
  =    83.8 %

Breakeven point = Fixed cost / P V Ratio
    = 142500 /83.8 %
    = Rs 170047

Units = 142500 / 41.9 = 3400(fixed cost /contribution)

Margin of safety = Sales – Break Even point
  = (50 x 10000) – 170047
  = Rs 329953
Expected sales = (Desired profit + Fixed Cost )/ P V Ratio
Change in PV Ratio = (Change in profit /change in sales ) x 100
 

Question – 5
Variable cost – Rs 15 / unit
Fixed Cost – Rs 200000
Sales = 100000 units @ Rs 50 / unit
Calculate
• Profit
• Calculate the amount of sales to increase profit by Rs 100000/- keeping sales price same
• Calculate number of units to be sold to earn same profit at same selling price if fixed cost is increased by 25 %
Solution
Profit = (sales – variable cost)  – Fixed Cost
= ((50 x 100000) – (15 x 100000)) – (200000)
= 3300000
PVR = contribution / Sales x 100
(50 -15)/50 x 100 = 70
Calculate the amount of sales to increase profit by Rs 100000/- keeping sales price same
Expected sales = (Desired profit + Fixed Cost )/ P V Ratio
= 3400000 + 200000 / 70 %
= Rs 5142857
Calculate number of units to be sold to earn same profit at same selling price if fixed cost is increased by 25 %
Expected sales = profit + Fixed cost / contribution per unit
= (3300000 + 250000)/35
= 101429 units