A PROJECT ON MARGINAL COSTING OF N H CRATION MASTER OF COMMERCE ADVANCE ACCOUNTANCY SEMESTER II (2012-13) SUBMITTED BY IRANNA SURSH WAGDARE ROLL

NO. 11 SHETH N.K.T.T. COLLEGE OF COMMERCE & SETH J.T.T. COLLEGE OF ARTS, THANE.

DECLARATION
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I, MR. IRANNA SURESH WAGDARE. SHETH N.K.T.T College, Thane. M.COM PART-1 (SEMESTER 2) hereby declare that I have completed this project on MARGINAL COSTING OF N H CRATION in the academic year 2012-2013. The information submitted is true and original to the best of my knowledge.

Place: Date: SIGNATURE MR. IRANNA SURESH WAGDARE

(SHETH N.K.T.T. COLLEGE, THANE) CERTIFICATE This is to certify that MR. IRANNA SURESH WAGDARE of M.COM (PART-1)
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Semester-II in academic Year 2012-2013 has completed the project on MARGINAL COSTING OF N M CREATION under the guidance of Mrs. Mukta Mangalvedhekar. Project Guide

External Examiner Examiner

Internal

PREFACE
Through this MARGINAL COSTING IN MANAGERIAL DECISION MAKING in n m creations I hope I have successfully managed to explain the concepts and processes with practical examples. While concepts of accounting principles are best understood only by actually applying them in practical purpose; clarity of theoretical concepts is very crucial to understand what the purpose of the calculations is. Keeping that in mind
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our group will first explain the concepts of overhead costing and later; through the company in light, help understand how the concepts are converted into the required format by accountants for the purpose of maintaining Books of Accounts. A brief overview of the company is also provided though much focus is given to our project related aspect. To conclude we share a common yet critical view of this topic that most managers would agree with and find relevant. N M Creations is a Manufacturing company that has been in business for over 4 years. Their clients include many famous brands of India.

ACKNOWLEDGEMENT
I would like to express our sincere gratitude to Mrs. Mukta Mangalvedhekar for giving us the opportunity to work on such an informative project which proved to be a very good learning experience. We would also like thank him for his valuable expertise and for guiding us throughout our project.
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We would also like to thank the Library staff for allowing us to use the library for our reference purpose. Finally, we would like to thank all those who have directly and indirectly helped us throughout our project and motivated us for its successful completion.

EXECUTIVE SUMMARY
We begin our project by throwing light on the various concepts of Marginal Costing including Contribution, Profit and Breakeven Analysis. Marginal Costing also helps in understanding the Margin of Safety and desired profit. This followed by a brief introduction of the company n m creations and their profile. Then through a detailed Profit and Loss Account of the Company for year ended 31st March 2008 we will
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explain the various elements listed and their relevance. These are followed by notes to explain the items included in the Fixed and Variable Costs and the basis for calculation. In conclusion we talk about the impact of Marginal Costing while taking Managerial Decision for the company specially reducing costs and project expansions. Our most relevant source for content was the company n m creations followed by the theory taught by Prof. Chopde and various books as well.

CONTENTS
SERIAL NO. 1 TOPIC PAGE NO.

About N M Creations Introduction

8 9
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3 4 5 6

Marginal Costing Concepts As a Accounting Tool Marginal Costing & Decision Making Conclusion Bibliography

12 14 22 25 24

N M CREATION
N M Creation introduces themselves as Manufacturers of full range of Garments which include Sportswear, Industrial wear. N M creations has been in business for more than 4 years with the Proprietor drawing valuable experience and training from the 3rd generation family business of textiles with personalized attention from Selection of Mill Made Fabric to Finishing. A special emphasis is given to the comfort of the wearer as per the pattern and specification laid down by the customer. Our clients include:
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MODISCH (suppliers & exporters of Garments to GAP n Wrangler Jeans) SAH SAFARI ( Brand : INTERNATIONAL NEWS & KKNY ) V N S TEXTILES ( supplier & exporter to ZEEMAN, BOSINI & NIKE)

At n m creations our Paramount concern is to maintain the highest standards of Quality at Competitive rates and provide the Maximum comfort. We appreciate if the undersigned is given an opportunity to present our credentials and display the workmanship of our products.

INTRODUCTION
The costs that vary with a decision should only be included in decision analysis. For many decisions that involve relatively small variations from existing practice and/or are for relatively limited periods of time, fixed costs are not relevant to the decision. This is because either fixed costs tend to be impossible to alter in the short term or managers are reluctant to alter them in the short term. Suppose a business occupies premises to carry out its activities. There is a downturn in demand for the service which the business provides and it would be possible to carry on the business from smaller, cheaper premises. Does this mean that the business will sell its old premises and move on to new ones
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overnight? Clearly, it cannot happen. This is partly because it is not usually possible to find a buyer for the premises at a very short notice and it may be difficult to move premises quickly where there is, let us say, delicate equipment to be moved. Apart from external constraints on the speed of move, the management may feel that the downturn might not be permanent. Thus, it would be reluctant to take such a dramatic step. It would mean to deny itself an opportunity of benefit from a possible revival of trade. The business premises may provide an example of an area of one of the more inflexible types of cost but most of the fixed costs tend to be broadly similar in this context. So, what we really see is that more than the fixed cost, what really influences decision making in the short-run is the variable cost which is actually synonymous with the marginal cost. Marginal costing is a technique of costing which analyses and presents costing information to the management in such a manner that the right decision is taken on managerial problems. It is also a technique where only variable cost or direct cost will be charged to the cost unit produced. Marginal costing shows the effect on profit of changes in volume or type of output by differentiating between fixed and variable costs. The analysis is segregated into short and long-run cases.

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At each level of production and time period being considered, marginal costs include all costs which vary with the level of production, and other costs are considered fixed costs.

Features of Marginal Costing System:

It is a method of recording costs and reporting profits All operating costs are differentiated into fixed and variable costs Variable cost charged to product and treated as a product cost whilst Fixed cost treated as period cost and written off to the profit and loss account Closing stock is valued on marginal cost

Advantages of Marginal Costing:

It is simple to understand re: variable versus fixed cost concept A useful short term survival costing technique particularly in very competitive environment or recessions where orders are accepted as long as it covers the marginal cost of the business and the excess over the marginal cost contributes toward fixed costs so that losses are kept to a minimum Its shows the relationship between cost, price and volume Under or over absorption do not arise in marginal costing

Stock valuations are not distorted with present years fixed costs Its provide better information hence is a useful managerial decision making tool It concentrates on the controllable aspects of business by separating fixed and variable costs
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The effect of production and sales policies is more clearly seen and understood

Disadvantages of Marginal Costing:

Marginal cost has its limitation since it makes use of historical data while decisions by management relates to future events It ignores fixed costs to products as if they are not important to production Stock valuation under this type of costing is not accepted by the Inland Revenue as it ignores the fixed cost element It fails to recognize that in the long run, fixed costs may become variable Its oversimplified costs into fixed and variable as if it is so simply to demarcate them It is not a good costing technique in the long run for pricing decision as it ignores fixed cost. In the long run, management must consider the total costs not only the variable portion Difficulty to classify properly variable and fixed cost perfectly, hence stock valuation can be distorted if fixed cost is classify as variable

Marginal Costing Concepts

FORMULA: 1. Marginal Cost Equation: SV=F+P

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Where, S = Sales V = Variable F = Fixed Cost P = Profit

2. P/V Ratio : P/V Ratio = Contribution x 100 Sales Contribution = Sales Variable

3. Break Even Sales: Break even point = Total Fixed Cost Contribution per unit

Break even point = Total Fixed Cost PV Ratio

4. Margin of Safety: Margin of safety = Actual Sales Break even Sales % of Margin of safety = Margin of safety x 100 Actual Sales Margin of safety = Profit P/V Ratio

5. Find Profit when Sales are given: Profit = Contribution Fixed Cost

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6. Sales required to earn profit: Sales required = Desired Contribution P/V Ratio which is: Sales required = Fixed Cost + Desired Profit PV Ratio

MARGINAL COSTING AS A MANAGEMENT ACCOUNTING TOOL

1. Marginal Costing is clearly the core aspect of traditional management accounting. Some of the classical applications of management accounting, however, have begun to lose their significance. The question thus arises: What is the current role of Marginal Costing in modern management accounting? 2. Businesses today frequently voice their disapproval of the traditional cost accounting approaches. At the beginning of the1990s, these criticisms were taken up by researchers involved with the applications of cost accounting concepts. The main thrust of the dissatisfaction with conventional cost accounting methods is that they are too highly developed and
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too complex, and furthermore are no longer needed in their current form since other tools are now available. Calls for increased use of cost management tools, investment analyses, and value-based tool concepts are frequently associated with criticism of the functionality of current cost accounting approaches as management tools. This line of criticism sees little relevance in traditional cost accounting tasks such as monitoring the economic production process or assigning the costs of internal activities. At their current level of detail, such tasks are neither necessary nor does their perceived pseudo accuracy further the goals of management. The viewpoint of the present author is that cost accounting has by no means lost its right to exist, for it is an easily overlooked fact that the data structure required by the new tools is already present in traditional cost accounting. 3. To assess the present-day value of Marginal Costing, the changes occurring in the business world must be analyzed more closely. We need first to look at how the purposes of cost accounting are shifting before we can determine its significance. (I) Cost planning takes precedence over cost control. The effort involved in planning and monitoring costs is increasingly being seen as excessive. The charge levied against traditional cost accounting--that its complex cost allocations merely generate a kind of pseudo precision--lends further credence to this assessment. An alternative increasingly being called for is to control costs through direct activity/process information (quantities, times, quality) for cost management at local, decentralized levels instead of relying on delayed and distorted cost data. In particular, empirical U.S. research on appropriate variables for performance measurement, in the context of continuous improvement and modern managerial concepts, is based on this view. The need for exact cost planning for profitability management is thus touched on ex ante. (ii) Cost accounting must be employed as a tool for cost control at an early stage. The relative significance of traditional cost accounting as a management accounting tool will decline as it is applied mainly to fields where costs cannot be heavily
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influenced. More significant than influencing the current costs of production with cost center controlling and authorized-actual comparisons of the cost of goods manufactured is timely and market-based authorized cost management. The greatest scope for influencing costs is at the early product development phase and when setting up the production processes. At the same time, this is the stage where cost information is most urgently needed since the time and quantity standards as defined by Bills of Materials (BOMs) and production routings are still lacking. This requires different methods of cost planning than those normally provided by Marginal Costing. (iii) The behavioral effect of cost information is starting to be recognized. There is a strong current of accounting research in the U.S. that takes human psychological factors into consideration. This is resulting in an extension of cost theory beyond its pure microeconomic basis. Results of theoretical and empirical research based, for example, on the principalagent theory indicate that knowledge of the "relevant" costs does not always lead to the optimization of overall enterprise profitability. Hence, the perspective that formed the basis for the absorption costing issue has changed. Theories according to which cost allocations can contain information and increase the efficiency of the use of available capacity, or where future allocations can influence ex-ante decisions, require empirical research.4. The shift in the purposes of cost accounting is being accompanied by a shift in the main applications of standard costing. Costing solutions for marketoriented profitability management and life-cycle-based planning and monitoring should be developed further. They should be implemented both in indirect areas and at the corporate level. In addition, cost accounting must be integrated into performance measurement. Competitive dynamics are giving rise to an increasing differentiation of market-based profitability controlling. This applies to the management of the profitability of products and product lines, as well as distribution channels and increasingly customers, customer groups, and markets. The information required for this purpose can only be supplied by multilevel and multidimensional
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marketing segment accounting based on contribution margin accounting. Long-term cost planning based on the idea of lifecycle costing is gaining in prominence compared with shortterm standard costing. Product decisions are increasingly based on more than just the cost of goods manufactured and sales costs and now tend to include pre-production costs (such as development costs) and phasing-out costs(such as disposal costs). Product decisions are viewed strategically. Whether or not a product is successful is determined by the amortization of its overall cost. Furthermore, the cost and revenue trend forecasts should be more dynamic to support the lifecycle pricing policy. This shift in cost and revenue planning is moving cost and revenue accounting in the direction of investment-related calculations. As management accounting is increasingly applied to the growing share of the costs of indirect areas, the tool requirements increase. After J. G. Miller's and T. E. Volkmanns discovery of the "hidden factory" as an area whose costs are neglected by conventional production costing in the U.S., it was only a small step to the identification of the lost relevance of conventional cost accounting by H. T. Johnson and R. S. Kaplan and their call to develop accounting systems separated into "process control, product costing, and financial reporting," which eventually led to activity-based costing. Improving the cost transparency of indirect activity areas through Marginal Costing requires a thorough understanding of the output processes. Analysis frequently shows that even many support activities have a wide range of repetitive processes for which planning and cost allocation using drivers is worthwhile, providing the costvolume is large enough. For this purpose, the different operations in the cost centers must be identified, for which resource consumption is then planned and tracked. The number of these operations is used as the driver. This process of costing operations using proportional costs competes with the attempt to achieve better cost transparency in indirect areas with process costing tools to also improve the planning and control of costs that were previously budgeted only as a lump sum. Industrial production and marketing are increasingly being handled by groups of affiliated companies. To plan and monitor the costs of these activities calls for the establishment of independent group cost accounting. This necessity results mainly from the requirements of inventory
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valuation, the costing basis of transfer prices, and to further the consistency of corporate cost accounting. Group cost accounting leads to the definition of independent group cost categories. Marginal Costing and its tools have been developed for individual companies and are the suitable platform for this expansion. Performance measures are gaining increasing prominence in decentralized management accounting. Standard U.S. management books devote a great deal of space to performance measurement in the broad sense of the word. The concept is broad for the reason that performance measurement is accompanied by the provision of decisionsupport information, the management of business units, and the use of incentive systems. Using modeling and empirical research, the exponents of this area are developing the idea that monetary factors are not the only possible components of performance measurement. Since the 1980s there has been a growing consciousness of the significance of continuously improving the performance capabilities of the company, resulting in the increased importance of nonmonetary indicators. The recent literature on performance measurement has focused on problems in the following areas:* the usability of performance information for managers,* The tenor of the recent investigations into performance measurement reflects the general criticism of management accounting voiced by Johnson and Kaplan in Relevance Lost. It was recognized that short-term accounting information is insufficient to evaluate and control company activities effectively. In particular, it was acknowledged that the use of standard costs does not adequately take performance improvements into consideration. Moreover, the conventional allocation approach based on the operating rate encourages high utilization of capacity at any cost, underestimates the problem of increasing numbers of variants, uses the wrong overhead allocation base, and fails to appreciate interdepartmental interrelationships. While top management benefits most from financial success indicators that it examines in monthly or longer intervals and that can consist of multidimensional aggregate figures, lower management must necessarily be concerned mainly with nonfinancial, operational, and very short-term data at the day or shift level. In concrete terms, measures in the categories of time, quantity, and quality--such as equipment downtime, lead time, response time, degree of utilization (ratio of actual output quantity to
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planned output quantity), sales orders, and error rate--are becoming increasingly significant for controlling business processes. In the strategic dimension, the Balanced Scorecard developed by Kaplan and Norton--which links financial and nonfinancial indicators from different strategically relevant perspectives including cause-effect chains--is the main proposal under consideration for performance measurement. The Balanced Scorecard links strategic contingencies to financial measures, incorporates success factors of the future, and explicitly includes monetary and nonmonetary parameters. The Balanced Scorecard therefore provides framework for systematic mapping and control of the critical success factors for an enterprise. A Balanced Scorecard is a system that defines objectives, measures, targets, and initiatives for each of the four perspectives of financial, customer, internal business process, and learning and growth. Further analyses and experience in measuring performance can enable identification and assessment of cause-effect relationships within the four perspectives (such as the effect of delivery time on customer satisfaction) and between the perspectives (such as the effect of customer satisfaction on profitability). The knowledge so gained may eventually lead to are formulation of strategy. In the context of comprehensive performance measurement, even short-term costs and financial results can serve as control instruments for strategic enterprise management, such as a lower authorized cost of goods manufactured as a benchmark. Concrete planned costs and planned results must be rigorously derived from higher-level target factors so that specific requirements can be derived in turn when they are broken down into smaller organizational units for the time and quantity standards. Information for decision making the need for a decision arises in business because a manager is faced with a problem and alternative courses of action are available. In deciding which option to choose he will need all the information which is relevant to his decision; and he must have some criterion on the basis of which he can choose the best alternative. Some of the factors affecting the decision may not be expressed in monetary value. Hence, the manager will have to make 'qualitative' judgments, e.g. in deciding which of two personnel should be promoted to a managerial position. A quantitative' decision, on the other hand, is possible when the various factors, and relationships
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between them, are measurable. This chapter will concentrate on quantitative decisions based on data expressed in monetary value and relating to costs and revenues as measured by the management accountant

FINANCIAL STATEMENT
N M CREATION
Trading and P/L Account for the year ending March 2008
Particulars Amount Particulars Amount(Rs)

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To opening stock To purchases DIRECT EXPENSES To warehouse charges To consultancy expenses To process charges To transport charges To yarn dyeing charges To twisting charges To weaving charges To warping charges To gross profit

(Rs) 18092527 55841336

By sales By closing stock

82,806,180 18,085,527

280,713 63,000 4,234,278 276,420 1,864,938 1,170,763 12,946,768 479,600 5,641,364 100,891,707 100,891,707

INDIRECT EXPENSES To audit fees To advertisement expenses To bank int & charges To brokerage on sales To comp maintainance To int on o/d To depreciation To electricity exp. To int on loan To petrol & diesel exp. To professional fees To salary & bonus To telephone exp. To misc.exp. To int on partners cap To insurance charges To car exp. To loan processing charges To net profit

13,500 9,600 22,779 430,990 3,000 223,204 923,851 915,324 1,598,306 237,069 7,500 610,000 44,446 12,000 479,278 30,000 21,810 4,500 61,207 5,648,364

By gross profit By disc.rec.

5,641,364 7,000

5,648,364

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Classification of Costs
Fixed Costs Amount(Rs .) Variable Costs Amount(Rs. ) (Rs) warehouse charges consultancy expenses to audit fees bank int & charges comp maintainance int on o/d Depreciation int on loan professional fees salary int on partners cap insurance charges loan processing charges 280,713 63,000 13,500 22,779 3,000 223,204 923,851 1,598,306 7,500 610,000 479,278 30,000 4,500 process charges transport charges yarn dyeing charges twisting charges weaving charges warping charges advertisement expenses brokerage on sales electricity exp petrol & diesel exp telephone exp misc.exp car exp. Purchase 4,259,631 4,234,278 276,420 1,864,938 1,170,763 12,946,768 479,600 9,600 430,990 915,324 237,069 44,446 12,000 21,810 55841336 78485342

MARGINAL COSTING ANALYSIS

Particulars SALES less VARIABLE COSTS CONTRIBUTION less FIXED COSTS PROFIT

Rs. 82,806,180 78485342 4320838 4,259,631 61207

P/V RATIO = CONTRIBUTION/SALES

5.22 %

BEP (Rs.) = FIXED COSTS/PV RATIO

Rs. 81602126

MARGIN OF SAFETY = ACTUAL SALES - BEP SALES Rs.1204054

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Marginal Costing in Decision Making

CASE - During the month of May 2008 n m creations was approached by Vivid Impex. They offered to Import worth Rs.A . This contract would give nm creations entry into European markets which was much needed as a Strategic Expansion Plan. If nm creations were to accept the order then it would increase their plant utilisation to 100% from the existing 80%. However Marginal Costing Analysis helped understand the profitability of the deal better. It is shown as follows: Existing Sales: Rs. 82,806,180 Import Order worth Rs. A Percentage increase in F.C on account of Import assignment : x % Percentage increase in V.C on account of Import assignment : y % Revised Sales: Rs. 82,806,180 + A Revised Variable Cost : 78485342 + y % Revised Contribution : (82,806,180 + A) - (78485342 + y %) = B Revised Fixed Cost : 4,259,631+ x % Revised Profit : B (4,259,631 + x %) = C Existing Profit : Rs.61207 Comparing the revised profit i.e. Profit arising after accepting the Import assignment (C) with the original profit i.e. Profit prevalent after rejecting the Import assignment, we can see that Marginal Costing enables us to reach a conclusion and make a Managerial Decision. If C > Existing Profit then the manager will accept the import assignment. If C < Existing Profit then the manager will reject the import assignment. Thus Marginal Costing is practically applicable and beneficial to the management.

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N.B: We have made assumptions regarding the amounts (figures) of the import assignment as the figures are confidential and the organization could not disclose them.

CONCLUSION
As managers it is important to understand how the application of marginal costing helps in managerial decision making. There are several ways to reduce marginal costing some can be: Decreasing working capital Implementing total quality management Controlling sales costs Studying maintenance costs Decreasing transportation expenses

Overhead costs are the indirect and sometimes invisible costs associated with producing a product or service. Making sales is more exciting than conserving expenses, but both are essential functions of the every business manager. Overhead costs, just like sales levels and direct expenses, should be examined on a consistent, routine basis. Allocating overhead costs to departments within the firm or to products within departments can assist the manager in identifying unprofitable aspects of the business. Break-even analysis can help a manager understand the implications of their overhead costs on their required sales volume, sales price or production structure. If business activity was stable and predictable, applying overhead costs to individual product units would be straight forward. The dynamic and uncertain business environment facing most firms has led to a variety of methods of matching overhead costs with individual products. These methods range from direct costing in which only variable costs are associated with individual products, to various absorption costing which allocate overhead costs. Consider the following example in which a manager attempts to establish product cost in light of a special order opportunity.

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BIBLIOGRAPHY
Books:

Cost Accounting and Financial Management, 2001 Samir Kumar Chakravarty

New Age International Pvt. Ltd

Advanced Cost Accounting, 1987 B.M. Lall, Nigam Himalaya Publication

Sites:

http://en.wikipedia.org/wiki/marginal_cost

www.accountingcoach.com http://www.referenceforbusiness.com/encyclopedia /Oli-Per/costingmethods.html

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