Marginal Costing - Cost Accounting | CMA Inter Syllabus
Traditional costing evolved in the early 1900s. In 1901, the British Federation of Master Printers set out to find a solution to the problem of setting prices on the basis of the cost of the product. Twelve years later, in 1913, they issued ‘The Printer’s Cost Finding System’, which was basically the absorption costing system that revolutionised the cost accounting scenario. The traditional system of cost accounting also known as the absorption costing is the most widely and the accepted methodology which records the cost accumulation process and is most significant in product pricing, but it is important to note that since it was designed for production companies, it dealt with production costs only and, as a consequence, it is less suitable for service or retail organisations.
It is important to note that traditional costing or absorption costing is used exclusively for pricing and external reporting purpose. It is not designed to make decisions of a short-term nature, and is therefore never be used for this purpose.
Marginal costing alias variable costing, which is the subject of this study note, is used when short-term decisions on matters such as product/service profitability is under consideration, but if long-term decisions need to be made, long-run average costs are required which an absorption costing system provides.
CIMA Official Terminology1 defines absorption costing or traditional costing as ‘a costing system which assigns direct costs and all or part of overhead to cost units using one or more overhead absorption rates. It is also referred to as full costing although this is a misnomer if all costs are not attributed to cost units.’
Marginal Costing is not a method of costing like job, batch or contract costing. It is a technique of costing in which only variable manufacturing costs are considered while determining the cost of goods sold and also for valuation of inventories. This technique is based on the fundamental principle that the total costs can be divided into fixed and variable. While the total fixed costs remain constant at all levels of production, the variable costs go on changing with the production level.
Para 4.14 of CAS – 3 (Revised 2015) defines variable cost as the costs which tends to directly vary with the volume of activity.
Para 4.17 of CAS - 1 (Revised 2015) defines fixed costs as costs which do not vary with the change in the volume of activity. Fixed indirect costs are termed fixed overheads.
It is important to note that fixed cost remain fixed for a particular period and is thus referred as period cost and that also within the relevant range. Whereas, variable costs are treated as product costs as these costs are traceable to the product.
In this regard it is important to note that there are costs which cannot be classified as variable cost nor as fixed cost. These costs are referred as semi-variable costs.
Para 4.30 of CAS - 1 (Revised 2015) defines semi variable costs as the costs that contain both fixed and variable elements. They partly change with the change in the level of activity.
Semi-variable cost are to be segregated into fixed and variable elements specifically for the purpose of analysis under marginal costing system. The segregation of the semi-variable cost has been considered, in details, in Module 1 in this Study material.
Definitions
Marginal cost
Fully absorbed product costs include fixed overhead, whereas the marginal cost of a product usually consists of variable costs only. It is defined as the change in aggregate costs due to change in the volume of production by one unit.
CIMA Official Terminology defines marginal cost as part of the cost of one unit of product or service that would be avoided if the unit were not produced, or that would increase if one extra unit were produced.
For example, if the total number of units produced are 800 and the total cost of production is ₹12,000, if one unit is additionally produced the total cost of production may become ₹12,010 and if the production quantity is decreased by one unit, the total cost may come down to ₹11,990. Thus the change in the total cost is by ₹10 and hence the marginal cost is ₹10. This change, particularly in the short run, is brought about by variable cost of production. The increase or decrease in the total cost is by the same amount because the variable cost always remains constant on per unit basis. The marginal production cost per unit of an item usually consists of the following:
Marginal costing
Marginal costing is an alternative method of costing to absorption costing. In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated. Closing inventories of work in progress or finished goods are valued at marginal (variable) production cost. Fixed costs are treated as a period cost, and are charged in full against profit in the accounting period in which they are incurred. It is defined as ascertainment of cost and measuring the impact on profit of the change in the volume of output or type of output. This is subject to one assumption and that is the fixed cost will remain unchanged irrespective of the change. Thus, the marginal costing involves firstly the ascertainment of the marginal cost and measuring the impact on profit of alterations made in the production volume and type.
CIMA Official Terminology2 defines marginal (or variable) costing as a technique which assigns only variable costs to cost units while fixed costs are written off as period costs.
The following example clarifies the issue of application of marginal costing:
Assume that company is manufacturing 45,000 units of product A, 50,000 units of product B and 30,000 units of product C in a particular year. If it decides to change the product mix and decides that the production of B is to be reduced by 5000 units and that of A should be increased by 5000 units, there will be impact on profits and it will be essential to measure the same before the final decision is taken. Marginal costing helps to prepare comparative statement and thus facilitates the decision-making. This decision is regarding the change in the volume of output. Now suppose if the company has to take a decision that product B should not be produced at all and the capacity, which will be available, should be utilized for A and B this will be change in the type of output and again the impact on profit will have to be measured. This can be done with the help of marginal costing by preparing comparative statement showing profits before the decision and after the decision. This is subject to one assumption and that is the fixed cost remains constant irrespective of the changes in the production. Thus, marginal costing is a very useful technique of costing for decision-making.
Contribution
Contribution is an important measure in marginal costing. It is calculated as the difference between sales value and marginal or variable cost.
CIMA Official Terminology2 defines contribution as ‘sales value – variable cost of sales’.
The term ‘contribution’ is really short for ‘contribution towards covering fixed overheads and making a profit’.
The term is derived from the concept that the sales revenue generated through sales after covering up for variable cost of sales (without which the sales revenue cannot be generated) contributes towards fixed cost and after recoup-ing the fixed cost the residue contributes towards profit.
Example 1
Let us assume that a fountain pen named Shikhar is sold by Lotus Ltd. for ₹14,500. The direct material cost (cost of blank, nib, clip and trims) per unit is ₹3,200, the direct labour cost per unit is ₹ 4100 and the variable production overhead cost per unit is ₹1,320. Fixed overheads per month are ₹1,00,000 and the budgeted production level is 100 units in a particular month.
The contribution is calculated as below:
| Particulars | (₹) | (₹) |
| Sale Price (per unit) | 14,500 | |
| Less: Variable cost of production | ||
| Direct material | 3,200 | |
| Direct Labour | 4,100 | |
| Variable production overhead | 2,320 | 9,620 |
| Contribution per unit | 4,880 |
In the above example there is a contribution of ₹4,880 for each unit of sale of Shikhar. This implies that sale of one unit of the fountain pen contributes ₹4,880 initially towards fixed overheads of ₹1,00,000 which is spent for the month and after such fixed overhead is recovered, towards profit. In the given situation the budgeted production level is 100 units in a particular month. Thus, ₹4,88,000 is the total contribution for the month which contributes towards the recovery of fixed cost for the month (₹1,00,000). Thus, profit (contribution – fixed cost) is ₹3,88,000.
Features of Marginal costing
Marginal costing is not a method of costing but it is a technique of costing distinct from the traditional costing absorption costing. The distinguishing features of marginal costing are as follows:
Income Statement
XYX Ltd
| Particulars | Amount (₹) | Amount (₹) |
| Sales | ||
| Less: Variable Cost | ||
| Contribution | ||
| Less: Fixed costs | ||
| Profit |
If the company is producing more than one product, the contribution from each product is combined as a pool from which the total fixed cost is deducted. Fixed cost is not charged to each product unless it is identifiable with a product.
From the above discussion it is clear that marginal costing is a technique of costing which advocates that only variable costs should be taken into consideration while working out the total cost of production and while valuing the inventory, only variable costs should be taken into the computation. Fixed costs should not be absorbed in the cost of production but should be charged to the Costing Profit and Loss Account. On the other hand, under absorption costing all indirect costs i.e. overheads are first apportioned and then absorbed in the production units. The difference between the absorption costing and marginal costing is discussed in the subsequent lines.
| Absorption Costing | Marginal Costing | |
| 1 | Costs are classified as direct and indirect, direct costs are identifiable with a particular product and hence charged directly. Indirect costs i.e. overheads are first identified, apportioned to the cost centers and finally absorbed in the product units on some suitable basis. | Costs and classified as fixed and variable. While direct costs are mostly variable, indirect costs, i.e. overheads may be semi variable. The variable portion in the total overhead cost is identified and thus, the total variable costs are computed. Only variable costs are charged to the product while the fixed costs are not absorbed in the product units. They are finally debited to the Costing Profit and Loss Account for computing the final figure of profit or loss. Thus, the cost of production under marginal costing is only the variable portion of the total costs. |
| 2. | The year-end inventory of finished goods under absorption costing is valued at total cost, i.e. fixed and variable. | The year-end inventory is valued at variable cost only. Fixed costs are not taken into consideration while valuing inventory, as they are not absorbed in the product units. |
| 3. | The fixed overhead absorption may create some problems like over/under absorption. This happens because of the overhead absorption rate which is pre determined. Suitable corrective entries are to be made to rectify the over/under absorption of overheads; otherwise the cost of production with be distorted. | The fixed overheads are charged directly to the Costing Profit and Loss Account and not absorbed in the product units. Therefore there is no question of under/over absorption of overheads. |
| 4. | Due to the inventory valuation, which is done at the full cost, the costs relating to the current period are carribe forward to the subsequent period. This will distort the cost of production. | Fixed costs are not taken into consideration while valuing the inventory and hence there is no distortion of profits. |
| 5. | The total cost of production is charged to the product without distinguishing between the fixed and variable components. The selling price is thus fixed on the basis of total costs. |
Only variable costs are charged to the cost of production and therefore the selling price is also based on only variable costs. This will result in fixation of selling price below the total costs. There is a possibility of starting a price war in such situations, which will be harmful to all the companies in the industry. |
The impact on the profit under the two cost accounting systems is summarized below:
The income statements under the two systems are presented in the following lines:
Income Statement (Absorption Costing)
| Particulars | (₹) | (₹) |
| Sales | -- | |
| - Direct material consumed | -- | |
| - Direct labour cost | -- | |
| - Variable manufacturing overhead | -- | |
| - Fixed manufacturing overhead | -- | |
| Cost of production | -- | |
| Add: Opening stock of finished goods (Value at cost of previous year’s production) | -- | |
| Less: Closing stock of finished goods (Value at production cost of current period) | -- | |
| Cost of Goods Sold | -- | |
| Add:(or less) Under (or Over) absorption of Fixed Manufacturing overhead | -- | |
| Add: Administration costs | -- | |
| Add: Selling and distribution costs | -- | -- |
| Total Cost | -- | |
| Profit (Sales–Total cost) | -- |
Income statement (Marginal Costing)
| Particulars | (₹) |
| Sales | -- |
| Variable manufacturing costs: | -- |
| - Direct material consumed | -- |
| - Direct labour | -- |
| - Variable manufacturing overhead | -- |
| Cost of Goods Produced | -- |
| Add: Opening stock of finished goods (value at cost of previous period) | -- |
| Less: Closing stock of finished goods (Value at current variable cost) | -- |
| Cost of Goods Sold | -- |
| Add: Variable administration, Selling and distribution overhead | -- |
| Total Variable Cost | -- |
| Contribution (Sale–Total variable costs) | -- |
| Less: Fixed costs (production, administration, selling and distribution) | -- |
| Net profit | -- |
Fundamental principle of marginal costing
Since fixed costs are constant within the relevant range of volume sales, the following is the net impact of selling one extra unit:
If the volume of sales falls by one unit, then profit will fall by the contribution of that unit. If the volume of sales increases by one unit, profit will increase by the contribution of that unit.
Fixed costs relate to time and is thus referred as the period cost, and do not change with increases or decreases in sales volume. It avoids the often arbitrary apportionment of fixed cost and highlights contribution, which is considered more appropriate for decision –making purposes.
Differential Cost Analysis
Differential costs are also known as incremental cost. This cost is the difference in total cost that will arise from the selection of one alternative to the other. In other words, it is an added cost of a change in the level of activity. This type of analysis is useful for taking various decisions like change in the level of activity, adding or dropping a product, change in product mix, make or buy decisions, accepting an export offer and so on. Thus, differential cost analysis is similar to marginal cost. In the following lines a conceptual understanding of the same is undertaken.
Differential cost represents the algebraic difference between the relevant costs for the alternatives being considered. Thus, when two levels of activities are being considered, the differential cost is obtained by subtracting the cost at one level from the cost of another level. The difference in total costs of two alternative courses of action will be the differential cost. The existing cost or original cost is compared with the prospective / expected or proposed cost. If the differential cost is negative (i.e. proposed cost less existing cost) then the proposal is acceptable else the proposal is rejected. Suppose, present cost is ₹ 1, 25,000 when the work is done by an existing machine and the estimated cost, when the work is done by new machine, is ₹ 1,05,000. There is a decrease in cost by ₹ 20,000 and the decision for replacement of machine should be implemented because there is an increase of profit by ₹ 25,000.
Essential features of differential costs are as follows:
Differential Cost Analysis and Marginal Costing
Differential costs are often considered as marginal costs but that is really too simplistic and the two terms are used to mean different things. Differential costs are simply, as stated above, the difference of total cost between two alternative courses of action and are therefore calculated on the basis of absorption costing or total costing but in marginal costing technique, analysis are made on the basis of variable costs and the fixed costs are considered as period costs and thus are excluded for the purpose of analysis. If the alternate course of action does not involve any extra fixed cost then change in variable costs will be equal to the differential costs and there will be no difference between differential costs and marginal costs.
Similarities
Differences
Limitations of Marginal Costing
Marginal costing technique is used for internal reporting purpose and for the purpose of decision making. For external reporting purpose, total costing or absorption costing is still the preferred method. The discussion made, in the above paragraphs, so far highlights only the positive aspects of marginal costing. In the following lines, some of the limitations of the technique are noted.
These limitations may be overcome by modifying the breakeven analysis. However, that would involve considerably more computation work and is beyond the scope of this study note.
Managers are concerned about the impact of their decisions on profit. The decisions managers make basically about volume of sales, pricing of products, or incurring a cost. Therefore, managers require an understanding of the relations among revenues, costs, volume, and profit. The cost accounting department supplies the data and analysis, called Cost-Volume-Profit (CVP) analysis, which facilitates managers to take their decisions. The term CVP analysis is interchangeably used with the term marginal costing. Surely the term CVP analysis is much broader in context and uses the similar technique as embedded in marginal costing.
CIMA’s Official Terminology defines Cost–Volume–Profit (CVP) analysis as ‘the study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and mix’.
The terms CVP analysis and the term breakeven analysis are used interchangeably. However, this is somewhat misleading, since the term break even analysis seems to imply that the focus of the analysis is the breakeven point – that is, the level of activity which produces neither profit nor loss.
Tools and techniques of CVP analysis
Contribution analysis
It has been already discussed that the fundamental aspect of CVP analysis alias marginal costing is that the excess of sales value and the variable cost of sales contributes to the fixed cost (period cost) and after recouping fixed cost the residue contributes towards profit. Thus, the issue of contribution is fundamental to CVP analysis.
If more than one product is produced, contributions of all products are added and out of aggregate contribution fixed costs are deducted to arrive at profit. Contribution is helpful in determination of profitability of the products. When there are two or more products, the product having more contribution is more profitable.
For example, the following are the three products with selling price and cost details :
| Particulars | A | B | C |
| Selling Price p.u. (₹) | 100 | 150 | 200 |
| Variable Cost p.u. (₹) | 50 | 70 | 100 |
| Contribution p.u. (₹) | 50 | 80 | 100 |
In the above example, one can say that the Product C is more profitable because, it has higher contribution. This proposition of product having higher contribution is more profitable is valid, as long as, there are no limiting factor.
Breakeven point
Contribution is so called because it contributes initially towards fixed costs (which is for a particular period and remains fixed within a relevant range) and then towards profit. As sales revenues grow from zero, the contribution also grows until it just covers the fixed costs. This is the breakeven point where neither profits nor losses are made. Thus, it is obvious that to break even, the amount of contribution must be exactly equal to the fixed costs. Thus, once the contribution per unit is calculated3, the number of units required to break even can be calculated as follows:
Breakeven point in units = Fixed costs / Contribution per unit
Example 2
Suppose that ASA Ltd. manufactures a particular fountain pen called ASA Durga, incurring variable costs of ₹30 per unit and fixed costs of ₹20,000 per month. If the product sells for ₹50 per unit, then the breakeven point can be calculated as follows:
Breakeven point in units = ₹ 20,000 / ₹ (50 – 30) = 1000 units per month
This implies that if ASA Ltd. manufactures 1000 units of the fountain pen called ASA Durga then the income statement of the manufacturer for the particular month would be as follows;
| Particulars | (₹) (per unit) | (₹) (1000 units) |
| Sale Price per unit | 50 | |
| Variable cost per unit | 30 | |
| Contribution per unit | 20 | |
| Total contribution (for 1000 units) | 20,000 | |
| Fixed cost for the month | 20,000 | |
| Profit | Nil |
Thus ASA Ltd. breaks even (no profit/no loss) at 1000 units per month.
It is obvious that;
Break-even point (in Amount) = Break-even point (in units) × Selling price per unit
In the above example, the Break-even point (in Amount) of ASA Ltd. is
= Break-even point (in units) × Selling price per unit = 1000 units × ₹ 50.00 = ₹ 50,000.00
Thus ASA Ltd. breaks even (no profit/no loss) when it’s sales revenue per month is ₹ 50000.
The margin of safety is the difference between the expected level of sales and the breakeven point. It is a reflection of the cushion. The larger the margin of safety, the more likely a profit will be made, i.e. if sales start to fall there is more leeway before the organisation begins to incur losses.
In the above example if for a particular month ASA Ltd. forecasts sales to be 1,700 units, the margin of is calculated as:
Margin of safety = projected sales – breakeven point
Margin of safety= 1700 – 1000 =700 units or 41% of Sales [(700 / 1700) × 100 ]
The margin of safety should be expressed as a percentage of projected sales to put it in perspective. To quote a margin of safety of 700 units without relating it to the projected sales figure is not giving the full picture.
The margin of safety might also be expressed as a percentage of the breakeven value, that is, 70 per cent of the breakeven value in this case.
The margin of safety can also be used as one route to a profit calculation. We have seen that the contribution goes towards fixed costs and profit. Once breakeven point is reached the fixed costs have been covered. After the break-even point there are no more fixed costs to be covered and all of the contribution goes towards making profits grow.
In our example the monthly profit from sales of 1,700 units would be ₹14,000 (₹20 per unit contribution × Margin of safety = ₹20 × 700 units). This is so because the Fixed cost of ₹20,000 is covered by ASA Ltd. by selling 1000 units of the ASA Durga in the particular month).
4. Contribution to Sales ratio (C/S) or Profit Volume Ratio (P/V)
The Contribution to Sales ratio (C/S) also referred as the Profit Volume Ratio (P/V) expresses the relationship between contribution to sales.
For example, P/V Ratio may be expressed as follows:
P/V Ratio (C/S ratio)4 = ( contribution per unit / sals ) × 100
A higher contribution to sales ratio means that contribution grows more quickly as sales levels increase. Once the breakeven point has been passed, profits will accumulate more quickly than for a product with a lower contribution to sales ratio. This ratio is based on the fundamental assumption that unit selling price and unit variable cost remain constant. When there is a change in selling price or variable cost of sales then the P/V ratio changes.
If it is assumed that a unit’s variable cost and selling price remains constant, then the C/S ratio (P/V ratio) will also remain constant.
In the above example, the P/V ratio is calculated as follows:
P/V Ratio (C/S ratio) = ( Contribution per unit / Selling price per unit ) × 100
= ( ₹ 20 / ₹ 50 ) × 100 = 40%
Or,
P/V Ratio (C/S ratio) = ( Total Contribution / Total Sales ) × 100
= ( 20 000 / 50 000 ) × 100 = 40 %
⸫ The Breakeven point (₹) = Fixed Cost / P / V Ratio
In the above example,
= Fixed cost / P/V Ratio = 20,000 / 40% = ₹ 50,000
Thus, ASA Ltd. breaks even (no profit/no loss) when it’s sales revenue per month is ₹50,000
There are situations when data for two periods is given and the per unit sale price or per unit variable cost of sales is not given then a modified version of the ratio is used. In such case the ratio is given as:
P/ V Ratio = ( change in contribution / change in sales ) × 100
Or, P/ V Ratio5 = ( Change in Profit / Change in Sales ) × 100
5. Variable Cost Ratio
The variable cost ratio is a cost accounting tool used to express a company’s variable production costs as a percentage of its net sales. The primary motive of calculating the ratio is to consider costs that may be subject to variations with the changes in production levels and compare them to the amount of revenues generated by the sales of that particular cycle of production.
The formula for the calculation of the variable cost ratio is as follows:
Variable Cost Ratio = Variable Cost / Net Sales
An alternate formula is given below:
Variable Cost Ratio = 1 – Contribution Margin
Variable Cost Ratio6 = 1 – P/V Ratio.
If P/V ratio is 40% (0.4). This implies that the Variable Cost ratio is 1 – 0.4 = 0.6 or 60%
6. Sales to earn target profit
Besides being able to determine the break-even point, CVP analysis determines the sales required to attain a particular income level or target profit. There are two ways in which target net income can be expressed:
As a specific rupee amount – As a specific rupee amount, the cost-volume equation specifying target profit is given as,
Sales = VC + FC + target profit
If q = volume in units, the above relationship can be rewritten as,
pq = uq + FC + target profit
Where,
p = sale price per unit
q = quantity sold
u = Variable cost per unit
The above equation can be written as,
q(p – u) = FC + target profit
Here7 (p – u) = contribution per unit
⇒ q = ( FC + target profit ) / (p – u)
⇒ target profit sales volume = ( FC + target profit ) / contribution per unit
Specifying target profit as a percentage of sales, the cost-volume equation is,
pq = uq + FC + % (pq)
⇒ q = FC / (p − u) − % (p)
⇒ q = FC / per unit contribution – profit as a % of unit sale price
Example 3
Suppose that ASA Ltd. manufactures a student level fountain pen and sales each fountain pen @ ₹25 per unit, the variable cost of sales of each fountain pen is ₹10 each and the fixed cost for a month is ₹15,000.
assume that ASA Ltd. wishes to attain:
Case 1. A target profit of ₹15,000 before tax
Case 2. A target income of 20% of sales
Now,
In Case 1, target profit sales volume (in units) required is,
Check, qtarget profit = Fixed cost + Target profit / ( p - u ) = 15,000 + 155 000 / ( 25 - 10 ) = 2,000 units
at 2000 units the income statement is:
| (`) | |
| Sales @ `25 per unit | 50,000 |
| Less: Variable cost @ `10 per unit | 20,000 |
| Contribution | 30,000 |
| Less: Fixed Cost | 15,000 |
| Target profit | 15,000 |
In Case 2, the target income volume required is,
⇒ q = FC / (p - u) – % (p)
⇒ q = 15000 / (25 - 10) - (20% 25 )
q = 15000 / (15 - 5) = 1500 units
Check,
at 1500 units, the income statement is:
| (`) | |
| Sales @ `25 per unit | 37,500 |
| Less: Variable cost @ `10 per unit | 15,000 |
| Contribution | 22,500 |
| Less: Fixed Cost | 15,000 |
| Target profit | 7,500 |
Profit is targeted at 20% of sales = 20% of 37,500 = `7,500 (as calculated in the above income statement).
7. Break-even analysis
Break-even analysis, a branch of CVP analysis, determines the break-even sales, which is the level of sales at which total costs equal total revenue. It refers to the identifying of the point where the revenue of the company starts exceeding its total cost i.e., the point when the project or company under consideration will start generating the profits by the way of studying the relationship between the revenue of the company, its fixed cost, and the variable cost. The break-even point, the point of no profit and no loss, provides managers with insights into profit planning. It can be computed in three different ways:
(i) The Equation Approach is based on the cost-volume equation, which shows the relationships among sales, variable and fixed costs, and profit:
S = VC + FC + Profit
Where,
S = Sales revenue
VC = total fixed cost
FC = total fixed cost
At the break-even sales volume,
S = VC + FC + 0 (by definition)
If q = volume in units, the above relationship can be rewritten as
pq = uq + FC
Where,
p = sale price per unit
q = quantity sold
u = Variable cost per unit
To find the break-even point in units, simply solve the equation for q.
Example 4
If it is assumed that ASA Ltd. manufactures a student level fountain pen and sales each fountain pen @ `25 per unit, the variable cost of sales of each fountain pen is `10 each and the fixed cost for a month is `15,000.
We know,
At the break-even sales volume,
S = VC + FC + 0.
And
If q = volume in units, the above relationship can be rewritten as,
pq = uq + FC
Where,
p = sale price per unit
q = quantity sold
u = Variable cost per unit
Therefore,
25 × q = 10 × q + 15000
or, 15 q = 15,000
or, q = 1000 units
Therefore, ASA Ltd. breaks even at a sales volume of 1,000 units.
(ii) The Contribution Margin Approach, another technique for computing the break-even point, is based on solving the cost-volume equation stated earlier.
Solving the equation, pq = uq + FC for q yields:
qBE
= p − u = Contribution per unit
Here qBE = break-even unit sales volume
If the break-even point is desired in terms of Rupees, then
Break – even point in Rupees = Break-even point in units × Unit sales price
Break – even point in Rupees = Fixed Cost
P / V Ratio
8. Angle of Incidence
The angle formed at the break-even point by the intersection of the sales line and the total cost line is known as
the angle of incidence. It should be the aim of the management to have a wider angle. The size of the angle indicates
the rate of profit earned after break-even point. A wider angle means a high rate of profit accruing after the fixed
costs are absorbed. On the contrary, a narrow angle means a relatively low rate of profit indicating that variable
costs constitute a large part of cost of sales.
(iii) The Graphical Approach is based on the so-called break-even chart as shown in Fig. 6.1. Sales revenue,
variable costs, and fixed costs are plotted on the vertical axis, while volume, x, is plotted on the horizontal
axis. The break-even point is the point where the total sales revenue line intersects the total cost line. The
chart can also effectively report profit potentials over a wide range of activity. The profit-volume (P--V)
chart, as shown in Fig. 6.2, focuses more directly on how profits vary with changes in volume. Profits are
plotted on the vertical axis, while units of output are shown on the horizontal axis. Note that the slope of
the chart is the unit contribution margin. The main advantage of the profit–volume chart is that it is capable
of depicting clearly the effect on profit and breakeven point of any changes in the variables.
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He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
He specializes in practical subjects – Accounting, Costing, Taxation, Financial Management. With over 12 years of teaching experience (Online as well as Offline), he SURELY KNOWS IT ALL.
"Koncept perfectly justifies what it sounds, i.e, your concepts are meant to be cleared if you are a Konceptian. My experience with Koncept was amazing. The most striking experience that I went through was the the way Yash sir and Ruchika ma'am taught us in the lectures, making it very interesting and lucid. Another great feature of Koncept is that you get mentor calls which I think drives you to stay motivated and be disciplined. And of course it goes without saying that Yash sir has always been like a friend to me, giving me genuine guidance whenever I was in need. So once again I want to thank Koncept Education for all their efforts."
"Hello everyone, I am Kaushik Prajapati. I recently passed my CA Foundation Dec 23 exam in first attempt, That's possible only of proper guidance given by Yash sir and Ruchika ma'am. Koncept App provide me a video lectures, Notes and best thing about it is question bank. It contains PYP, RTP, MTP with soloution that help me easily score better marks in my exam. I really appericiate to Koncept team and I thankful to Koncept team."
"Hi. My name is Arka Das. I have cleared my CMA Foundation Exam. I cleared my 12th Board Exam from Bengali Medium and I had a very big language problem. Koncept Education has helped me a lot to overcome my language barrier. Their live sessions are really helpful. They have cleared my basic concepts. I think its a phenomenal app."
"I cleared my foundation examination in very first attempt with good marks in practical subject as well as theoretical subject this can be possible only because of koncept Education and the guidance that Yash sir has provide me, Thank you."
