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UNIT-2 MARGINAL COSTING & BUDGETARY CONYROL Marginal cost represents the amount of any given volume of output

by which the aggregate cost are changed if the volume of output is increased by one unit. Marginal costing is a technique which is concerned with the changes in costs and profits resulting from changes in volume of output. Contrib tion Is defined as excess of selling price over variable cost per unit. Also known as gross margin or contribution margin. MARGINAL COST E!UATION" Contribution = Sales !ariable Cost Or Contribution= S." # !ariable cost Or Contribution=$ixed Cost %& "rofit&'oss AD#ANTAGES O$ CONTRIBUTION (. It helps management in fixation of selling price. ). It assists in determining the breakeven point. *. It helps management in selection of a suitable product mix. +. It helps in choosing from among the various alternatives. %RO$IT #OLUME RATIO ,he profit&volume ratio is also called the contribution ratio- or marginal ratio expresses the relation of contribution to sales. %&# RATIO= SA'.S !A/IA0'. C1S, 2 (33 SA'.S 1/ %&# RATIO= $I2.4 C1S,% "/1$I,%!A/IA0'. C1S, !A/IA0'. C1S, 2 (33 SA'.S 1/ %&# RATIO= $I2.4 C1S, % "/1$I, SA'.S (

$EATURES O$ MARGINAL COSTING

(. It is a technique of analysis and presentation of cost which helps management in taking decisions. ). All elements of cost are classified into variable and fixed component. *. !ariable costs are regarded as the cost of product. +. $ixed costs are treated as period cost and are charged to profit and loss account.

AD#ANTAGES O$ MARGINAL COSTING (. Simple to operate and easy to understand. ). /emoves complexities of overheads. *. 5elps in cost control. +. $acilititates calculation of break even point.

DISAD#ANTAGES O$ MARGINAL COSTING (. It is based upon number of assumptions. ). All cost are not divisible into fixed and variable. *. $ixed cost do not remain constant. +. !ariable cost remain cost.

Br'a( ')'n *oint" ,he break even point can also be computed graphically. A break even chart is a graphical representation of marginal costing. ,he break even chart portrays a pictorial view of the relationship between cost- volume 6 profit. It indicates the estimated profit or loss at various levels of output. ,he break even point is when the total sales intersect total cost line.

Area 0reak .ven point Angle of Incidence "rofit Cost 6 /evenue 7argin of Safety ,otal cost line !ariable .xpense Area 'oss .xpense 1utput 8in units9 $ixed cost 'ine $ixed "rofit

ASSUM%TIONS All cost can be separated into fixed and variable cost. $ixed cost remain at all levels of activity. !ariable cost fluctuates directly in proportion to changes in the volume of output. Selling "rice per unit remain constant at all levels of activity . ,here will be no opening or closing stock. ,here will be no change in operating efficiency.

A+)antag's" *

-It is in simple form 6 clearly understandable It is very useful for taking managerial decisions It helps in knowing the profitability of different products. It helps in forecasting.

Li,itations" It is based upon a number of assumptions. It provides limited information. It only gives a static view of the problem.

MANAGERIAL A%%LICATIONS O$ MARGINAL COSTING


-& %RICING DECISIONS" "rices are generally decided on the basis of market conditions and there could be other factors as well yet marginal costing technique assists the management in the fixation of selling prices under various circumstances: "ricing under normal conditions. 4uring stiff competition. 4uring trade depression. $or accepting special bulk orders. $or accepting additional orders and exploring new markets. 2& %RO$IT %LANNING AND MAINTAINING A DESIRED LE#EL O$ %RO$IT" "rofit planning involves the planning of future operations to achieve maximum profits or to maintain a desired level of profit. DESIRED SALES . $I/ED COST 0 DESIRED %RO$IT %1# RATIO 2& MA3E OR BUY DECISION" +

,he company has to decide whether to make the product in the factory or to buy the product from outside and then speciali;e it. 4& %ROBLEM OR 3EY LIMITING $ACTOR" In an organi;ation all the factors of production are not available .,he factor which is not easily available becomes the key or limiting factor to the organi;ation .,he company<s =ob is to fulfill the problem or key factor . 5& SELECTION O$ A SUITABLE %RODUCTION1SALES MI/" In an organi;ation the problem arises when more than one product arises in the organi;ation. ,he better output and earnings the product is giving to the organi;ation is retained. 6& E$$ECTS O$ C7ANGES IN T7E SALES %RICE" ,he effect of changes in the sales price are due to competition- govt policiescustomer preferences - expansion programmes. > .ALTERNATI#E MET7ODS O$ %RODUCTION" Company<s time to time check which technology would give better output. .xample machine A gives better output than 0 so machine A would be retained in the business. ?. DETERMINATION O$ O%TIMUM LE#EL O$ ACTI#ITY" 7arginal costing helps in determining the desired level of output. Contribution at different levels of activity can be found and the level of activity which gives highest contribution will be the optimum level. ,he level of production can be raised till the marginal cost does not exceed the selling price. @. E#ALUATION O$ %ER$OMANCE: ,ime to time we need to check upon the performance level of employees a well as working of machinery or technology. (3. CA%ITAL IN#ESTMENT DECISIONS" Ahere the investment need to be done. Ahether the company should go in for the mergers and acquisitions of a company

B +g't
B

A budget is a financial or qunatitave statement prepared prior to a defined period of timeof the policy to be pursued during that period for the purpose of attaining a given ob=ective. 0udgeting is a technique of following budgets. B +g'tar8 control" /efers to the principles- procedures and practices of achieving given ob=ectives through budgets.

Ob9'cti)'s "

(. ,o ensure planning for future by setting various budgets. ). ,o coordinate various activities of different departments. *. ,o operate various cost centers . +. .limination of waste and increase in profitability. B. ,o centrali;e the control system. RE!UISITES O$ GOOD BUDGETARY CONTROL (. ). *. +. B. C. >. Clarifying ob=ectives. "roper of delegation of authority and responsibility. "roper communication system. 0udget education. "articipation of all employees. $lexibility. BUDGETARY CONTROL 7otivation to employees. DISAD#ANTAGES C

AD#ANTAGES

(. ). *. +. B. C. >. ?. @.

7aximi;ation of profits "roper co ordination "rovides specific aims ,ools for measuring performance. .conomy. Corrective Action. Creates budget consciousness /educed costs. 4etermine weakness. T8*'s o: B +g'ts"

(. ). *. +. B.

Encertain future /evised required. 4iscourage effective persons. "roblem of co ordination. Conflict among different departments. C. 4epends upon support to top management.

(. $i;'+ B +g't" A fixed budget remains the same irrespective of changed situations. ). $l';ibl' B +g't" A flexible budget is recast to suit the changed circumstances. *. <'ro bas' b +g'ting" A planning 6 budgeting process which requires each manager to =ustify his entire budget .It starts from the Dero level or base level while preparing budgets. It is the latest technique of budgeting and it has increased used as a managerial tool. St'*s" (. 1b=ective of budgeting should be determined. ). ,he extent to which ;ero base budgeting is to be applied should be decided. *. 4eveloping decision packages +. cost 6benefit analysis should be undertaken B. $inal step is selecting- approving decision packages 6 finali;ing the budgets. A+)antag' It enables mgmt to allocate funds. analysis cant be done. It improves the efficiency ranking of decision It will help in identifying economical 6 wasteful areas. Disa+)antag' Computation of cost benefit 4ifficulty in formulation of plans 6 policies Involves lot of time 6 cost factor.

>

+. %'r:or,anc' B +g'ting" %'r:o,anc' b +g'ting" As a budget based on functions- activities and pro=ects. "erfomance budgeting may be described as the budgeting system in which input cost are related to the perfomance. It seeks to establish between input8costs9 and their direct output.

It in)ol)'s" 4evelopment programmes o perfomnce crieteria for various

Assesment of the perfomance. Comparison between standard 6 actual. Endertaking the periodic review of perfomance. Di::'r'nc'" Basis Rigi+it8 $i;'+ b +g't $l';ibl' B +g't

A fixed budget remains the same A flexible budget is recast to irrespective of changed situations. suit the changed circumstances.

Con+itions

A fixed budget assumes that ,his budget is changed if level conditions will remain constant of activity varies. In fixed budget costs are not ,he cost are studied as per their classified according to their nature. nature.

Cost classi:ication

C=ang's )ol ,'

in Is difficult

Accurate forecast.

Cost Asc'rtain,'nt

Ender changed circumstances cost Cost can easily be ascertained. cannot be ascertained.

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