ACKNOWLEDGEMENT

“Acknowledging the debt is not easy for us we are indebted to so many

people”.
I take this opportunity in expressing the fact that this project report is the
result of incredible amount of encouragement, co-operation and moral
support that I have received from others.
Words alone cannot express my deep sense of gratitude to “MR. ABHIJIT PAL”,
who provided me an opportunity to do a project on the topic “MARGINAL
COSTING”. His valuable guidance and support made this project work an
enlightening experience. His consistent support and co-operation showed the
way towards the successful completion of project.
I would like to express my deep sense of gratitude to all the member, who
directly or indirectly helped me during my project work.
 PREFACE
In any organisation, the two important financial statements are balance sheet
and profit and loss account of the business. Balance sheet is a statement of
financial position of an enterprise at a particular point of time, profit & loss
account shows the net profit and net loss of the company for a specified period
of time. When these statement of the last few years of the company are
studied and analysed, significant conclusion may be arrived regarding the
changes in the financial position, the important policies followed and trend in
profit & loss etc. Analysis and interpretation of financial statement has now
become an important technique of credit appraisal.
 INDEX
Sl. Contents Page No.
No
1 Acknowledgement
2 Preface
3 Objective
4 Importance of objective
5 Company Profile
6 Introduction of Marginal Costing
7 Meaning and Definition
8 Features of Marginal Costing
9 Advantages of Marginal Costing
10 Disadvantages of Marginal Costing
11 Basic principal of Marginal Cost pricing
12 Absorption Costing (meaning)
13 Advantages and disadvantages
14 Marginal costing V/S Absorption Costing
15 Contribution Analysis
16 Break-even-analysis
17 Assumption and Limitation
18 Cost-Volume profit (C.V.P) Analysis
19 Marginal costing and Decision making
20 Technique of Costing
21 Marginal Cost equations
22 Absorption Costing pro-forma
23 Marginal Costing pro-forma
24 Problems
25 Research Methodology
26 Data Analysis and Interpretation
27 Conclusion
28 Recommendation
29 Bibliography
30 Annexure
 Objectives of Marginal Costing

The present study “Marginal costing” of Reliance Industry has been designed
to achieve the following objectives: -
1. Distinguish between Direct and Indirect costs, Fixed and Variable
Cost.
2. To judge the financial position of the company basing upon marginal
costing by means of break-even chart.

Importance of Marginal Costing

1. Marginal Costings makes easier to determine and control cost of

production.

2. By avoiding the arbitrary allocation of fixed overhead costs, Management

can concentrate on achieving and maintaining a uniform and consistent
marginal costing.

3. Marginal Costing is simple to understand and operate and it can be

combined with other forms of costing e.g.: Budgetary Costing and Standard
Costing.

4. Marginal Costing can help determine which customer are worth keeping
and which are worth eliminating.

5. Marginal costing is useful in plotting changes in profit level as the level of

sales volume changes.
RELIANCE INDUSTRIES LIMITED
INTRODUCTION

Reliance Industries Limited (RIL) is an Indian conglomerate holding

company headquartered in Mumbai, Maharashtra, India. Reliance owns
businesses across India engaged in energy, petrochemicals, textiles,
natural resources, retail, and telecommunications. Reliance is one of the
most profitable companies in India, the largest publicly traded company
in India by market capitalization and the second largest company in India
as measured by revenue after the government-controlled Indian Oil
Corporation. On 18 October 2007, Reliance Industries became the first
Indian company to breach $100 billion market capitalization.
The company is ranked 148th on the Fortune Global 500 list of the world's
biggest corporations as of 2018. It is ranked 8th among the Top 250 Global
Energy Companies by Platts as of 2016. Reliance continues to be India’s
largest exporter, accounting for 8% of India's total merchandise exports
with a value of Rs 147,755 crore and access to markets in 108 countries.
Reliance is responsible for almost 5% of the government of India's total
revenues from customs and excise duty. It is also the highest income tax
payer in the private sector in India.
HISTORY OF THE COMPANY

1960–1980
The company was co-founded by Dhirubhai Ambani and Champaklal Damani
in 1960's as Reliance Commercial Corporation. In 1965, the partnership
ended and Dhirubhai continued the polyester business of the firm. In 1966,
Reliance Textiles Engineers Pvt. Ltd. was incorporated in Maharashtra. It
established a synthetic fabrics mill in the same year at Naroda in Gujarat. On
08 May 1973, it became Reliance Industries Limited. In 1975, the company
expanded its business into textiles, with "Vimal" becoming its major brand in
later years. The company held its Initial public offering (IPO) in 1977. The
issue was over-subscribed by seven times. In 1979, a textiles company
Sidhpur Mills was amalgamated with the company. In 1980, the company
expanded its polyester yarn business by setting up a Polyester Filament Yarn
Plant in Patalganga, Raigad, Maharashtra with financial and technical
collaboration with E. I. du Pont de Nemours & Co., U.S.

1981–2000
In 1985, the name of the company was changed from Reliance Textiles
Industries Ltd. to Reliance Industries Ltd. During the years 1985 to 1992,
the company expanded its installed capacity for producing polyester yarn
by over 145,000 tonnes per annum. The Hazira petrochemical plant was
commissioned in 1991–92.
In 1993, Reliance turned to the overseas capital markets for funds
through a global depositary issue of Reliance Petroleum. In 1996, it
became the first private sector company in India to be rated by
international credit rating agencies. S&P rated Reliance "BB+, stable
outlook, constrained by the sovereign ceiling". Moody's rated "Baa3,
Investment grade, constrained by the sovereign ceiling”. In 1995/96,
the company entered the telecom industry through a joint venture
with NYNEX, USA and promoted Reliance Telecom Private Limited in
India. In 1998/99, RIL introduced packaged LPG in 15 kg cylinders
under the brand name Reliance Gas. The years 1998–2000 saw the
construction of the integrated petrochemical complex at Jamnagar in
Gujarat, the largest refinery in the world.

2001 onwards
In 2001, Reliance Industries Ltd. and Reliance Petroleum Ltd. became
India's two largest companies in terms of all major financial parameters. In
2001–02, Reliance Petroleum was merged with Reliance Industries.
In 2002, Reliance announced India's biggest gas discovery (at the Krishna
Godavari basin) in nearly three decades and one of the largest gas discoveries
in the world during 2002. The in-place volume of natural gas was in excess of 7
trillion cubic feet, equivalent to about 1.2 billion barrels of crude oil. This was
the first ever discovery by an Indian private sector company.
In 2002–03, RIL purchased a majority stake in Indian Petrochemicals
Corporation Ltd. (IPCL), India's second largest petrochemicals company, from
the government of India. IPCL was later merged with RIL in 2008.
In 2005 and 2006, the company reorganized its business by demerging its
investments in power generation and distribution, financial services and
telecommunication services into four separate entities.
In 2006, Reliance entered the organized retail market in India with the launch
of its retail store format under the brand name of 'Reliance Fresh'. By the end
of 2008, Reliance retail had close to 600 stores across 57 cities in India.
In November 2009, Reliance Industries issued 1:1 bonus shares to its
shareholders.

In 2010, Reliance entered the broadband services market with acquisition

of Infotel Broadband Services Limited, which was the only successful
bidder for pan-India fourth-generation (4G) spectrum auction held by the
government of India. In the same year, Reliance and BP announced a
partnership in the oil and gas business. BP took a 30 per cent stake in 23 oil
and gas production sharing contracts that Reliance operates in India,
including the KG-D6 block for $7.2 billion. Reliance also formed a 50:50
joint venture with BP for sourcing and marketing of gas in India.
In 2017, RIL set up a joint venture with Russian Company Sibur for setting up a
Butyl rubber plant in Jamnagar, Gujarat, to be operational by 2018.
DHIRUBHAI AMBANI
Dhirajlal Hirachand Ambani, popularly known as Dhirubhai Ambani (28
December 1932 – 6 July 2002) was an Indian business tycoon who
founded Reliance Industries in Bombay. He appeared in The Sunday Times top
50 businessmen in Asia. Ambani took Reliance Industries public in 1977 and by
2002, when Dhirubhai Ambani died the combined fortune of the family was $6
billion. Ambani died on 6 July 2002. In 2016, he was honored posthumously
with the Padma Vibhushan, India's second highest civilian honor for his
contributions in trade and industry.

MUKESH AMBANI
Mukesh Dhirubhai Ambani (born 19 April 1957) is an Indian business
magnate, the chairman, managing director, and the largest shareholder of
Reliance Industries Limited(RIL), a Fortune Global 500 company and India's
most valuable company by its market value. According to the Forbes
magazine, he is the richest Asian and the 13th richest person in the world as
of March 2019.

ANIL AMBANI
Anil Dhirubhai Ambani (born 4 June 1959) is an Indian businessman. He is the
chairman of Reliance Group (also known as Reliance ADA Group), which came
into existence in July 2006 following a demerger from Reliance Industries
Limited. He leads a number of stock listed corporations including Reliance
Capital, Reliance Infrastructure, Reliance Power and Reliance Communications.
As of February 2019, Ambani's net worth was $1.7 billion. According to Forbes
magazine, in 2006, he was the 6th richest person in the World.
 INTRODUCTION TO MARGINAL COSTING

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. Marginal costing distinguishes between fixed costs and

variable costs as convention ally classified. The marginal cost of a product –

“is its variable cost”. This is normally taken to be; direct labor, direct

material, direct expenses and the variable part of overheads.

Like Marginal costing or job costing, Marginal costing is not a distinct

method of ascertainment of cost but is a technique which applies existing

methods in a particular manner so that the relationship between profit &

the volume of output can be clearly brought out. Marginal costing ascertains

marginal or variable costs & the effect on profit, of the changes in volume or

type of output, by differentiating between variable costs & fixed costs. To

any type of costing such as historical, standard, Marginal or job; the

Marginal costing technique may be applied.

Under the Marginal of Marginal costing, from the cost components, fixed

costs are excluded. The difference which arises between the variable costs

incurred for activities & the revenue earned from those activities is defined

as the gross margin or contribution. It may relate to total sales or may relate

to one unit.

For the business as a whole, Contribution earned by specific products

or group of products, are added so as to calculate the „pool‟ of total

contribution. The fixed costs of the business are paid from this „pool‟

& then the part of the total contribution which remains becomes the

profit of the business as a whole.

 Meaning and Definition of Marginal Costing

Marginal costing is a costing technique wherein the marginal cost, i.e. variable
cost is charged to units of cost, while the fixed cost for the period is completely
written off against the contribution. The term marginal cost implies the
additional cost involved in producing an extra units of output which can be
reckoned by total variable cost assigned to one unit. It can be calculated as
Marginal Cost =Direct Material + Direct Labour + Direct Expenses + Variable
Overheads
 Features of Marginal costing

Classification of costs into fixed costs & variable costs is done under

Marginal costing system. Also semi-fixed or semi-variable cots get further

classified into fixed & variable elements.

 This technique is used to ascertain the marginal cost and to know the

impact of variable costs on the volume of output.

 All costs are classified on the basis of variability into fixed cost and

variable cost. Semi-variable costs are segregated into fixed and

variable costs.

 Marginal costs are treated as the cost of the product or service. Fixed

costs are charged to costing Profit and Loss account of the period in

which they are incurred.

 Stock of finished goods and work-in-progress are valued on the basis

of marginal costs.

 Selling price is based on marginal cost plus contribution.

 Profit is calculated in the usual manner. When marginal cost is

deducted from sales it gives rise to contribution. When fixed cost is

deducted from contribution it results in profit.

 Break-even point analysis and cost-volume profit analysis are integral

parts of this technique.

 ADVANTAGES OF MARGINAL COSTING

➢ As there is involvement of computation of variable costs only in

marginal costing it is easy to understand & operate the same.
➢ Among different products or departments arbitrary apportionment of
fixed costs is avoided & the under recovery or over recovery problem
is eliminated.
➢ Any attempt of measurement of relative profitability of different
products or different products or different departments become
complicated due to the arbitrary apportionment of fixed cost.
➢ Analysis of contribution , BE charts & analysis of cost volume profit
analysis are resulted out of marginal cost system for making short term
decisions of all these are important.
➢ More uniform & realistic figures are resulted out of marginal cost
system because fixed overheads are excluded from valuation of
stock & work in progress.
➢ Apportionment of responsibility of control can be more easily
done since to each level of management only variable cost are
prepared over which they have control
➢ The effects of their decisions can be more readily seen by all levels of
management sometimes even before taking an action.
 DISADVANTAGES OF MARGINAL COSTING

The marginal of separating semi variable or semi fixed cost into their
variable & fixed elements is an arbitrary exercise which at different levels
of output may be subject to influctuation & inaccuracy. Consequently a
substantial degree of error may be contained in the basic cost of
information which is used in decision making marginal.

➢ When selling price are based on marginal costing great care need to be
exercised as in long run all fixed overheads should be covered by the
prices & a reasonable margin over & above the total costs should be
left.
➢ Under many circumstances the deduction of contribution made by
some production units can be difficult. There by the effectiveness of
the system is lost.
➢ Since on the basis of variable cost only the valuation of stock of
finished goods & work in progress is done they are always
understated. As a result profit is also understated.

More effective utilization of present resources or by expansion of

resources or by mechanization increased production & sales may be
effected. The disclosure of this fact cannot be done by marginal costing.
 BASIC PRINCILPLES OF MARGINAL COSTING

5 years economists have added the benefits of marginal cost based prices &
have advocated their use . Not until fairly recently however has the concept
of marginal cost pricing received a widespread attention in electric utility rate
setting in the United States. Economists theory states that maximum
economic benefits to society can be achieved if prices are set equal to the
marginal cost the customer will pay an amount that adequately reflects the
cost to the society of producing the product. In this way economic efficiency
is achieved in that society’s scarce resources are used in productive marginal
where the prices of finished goods & services adequately reflect the actual
costs of producing them.
 ABSORBTION COSTING

It refers to the analysis of the cost data for the purpose of allotment of costs
to cost units. In average costing fixed as well as variable cost are charged to
products. We have seen in marginal costing that now the direct costs &
overheads whether fixed or variable are charged to the individual product,
marginal or contract. The technique of Average costing thus refers to
principle of allocation apportionment & absorption of costs used for
ascertaining the cost of product, marginal or contract.
 Disadvantage and Advantage of Absorption Costing

Advantages of Absorption Costing

 Fair Pricing: Absorption Costing covers both variable costs and fixed costs
while determining the cost pf unit of a product. So, it is suitable method
to determine the fair price of product and services.
 Importance of Fixed Cost: Absorption Costing system recognizes the
importance of fixed manufacturing costs and treats them as product cost.
 Easy to Operate: Absorption Costing system of product costing is simple
method which can be installed and operate easily without any
complication. It consumes less time and costs to operate.
 Accurate Profitability: Absorption Costing system helps to determine
accurate profitability in the case of seasonal production and sales.
 No Separation of Costs: There is no need to separate costs into variable
costs and fixed costs in this system.
 Preparing Final Accounts: Absorption Costing helps to prepare income
statement and final account of the company.

Disadvantage of Absorption Costing

 Not Suitable for Decision Making: Absorption Costing does not provide
detailed information about fixed and variable costs. Therefore, it may not
be useful for management for planning and decision making purpose.
 Not Suitable for Flexible Budget: Flexible budget cannot be prepared
with the help of absorption costing because it does not make distinction
between fixed and variable costs.
 Artificial Profitability: In absorption costing, more profit can be shown by
moving fixed manufacturing costs from income statement. It misleads
the users.
 Marginal Costing vs Absorption Costing
 Marginal costing doesn’t take fixed costs into account under product
costing or inventory valuation. Absorption costing, on the other hand,
takes both fixed costs and variable costs into account.
 Marginal costing can be classified as fixed costs and variable costs.
Absorption costing can be classified as production, distribution, and
selling & administration.
 The purpose of marginal costing is to show forth the contribution of the
product cost. The purpose of absorption costing is to provide a fair and
an accurate picture of the profits.
 Marginal costing can be expressed as contribution per unit. Absorption
costing can be expressed as net profit per unit.
 Marginal costing is a method of costing and isn’t a conventional way of
looking at costing method. Absorption costing, on the other hand, is
used for financial and tax reporting and it is the most conventional
method of costing.
 Marginal costing is presented by outlining the total contribution.
Absorption costing is presented in the most conventional way for the
purpose of financial and tax reporting
 CONTRIBUTION ANALYSIS
Contribution analysis is the step by step approach designed by managers to
assess about the contribution a program has made to some particular goal. It
analyses the effect of the internal and the external factors in the contribution.
It estimates the direct variable costs and the selling price of a range of
products. It computes how each unit sold will contribute towards recovering
the fixed business costs, once the fixed costs are met these contribution
becomes the profit of the firm. The contribution analysis also shows the
constraints of the firm.
This contribution margin helps us assess the profitability of individual products.
If say the contribution margin of a particular product is 10% which is lower
than the other product in the business. If the variable costs of the product
can’t be reduced the company may decide to drop the product. So a large firm
does contribution analysis to take decisions mostly in case of pricing.
For Example:
A company sells 10,000 shoes for total revenue of $500,000 with the cost of
goods sold of $250,000, and shipping & labour expense of $200,000.
The formula for contribution margin dollar per unit is
(Total revenue – variable costs)/ # of unit sold
($500,000 - $250,000 - $200,000)/ 10,000= $5.00 per shoe
 Break – Even Analysis
Break – even point means of no profit and no loss. BEP is the volume of output
or sales at which the total cost is exactly equal to the revenue. Below the BEP
the concern makes losses, at the BEP the concern makes neither profit nor
loss, above the BEP, the concern earns profits. The fixed point of this analysis is
the determination of the sales volume that will equal its total revenues to its
total costs, Thus, where the profit equal zero. As stated earlier, since direct
connection of expenses to production cannot be conclusively established
under functional classification of costs, analysis under CVP, as well as BE
analysis, is directed towards cost behaviour.
 Assumptions and Limitations Underlying
BREAK-EVEN ANALYSIS

1. All costs are classified as either fixed or variable. If not impossible or

impractical, dividing costs into the variable and fixed cost elements as

an extremely difficult job. This is attributable to the inherent nature

or characteristics of the cost per se. Fixed costs remain constant

within the relevant range. Fixed costs remain unchanged at any level

of activity within the relevant range, even at the zero level.

2. The behaviour of total revenues and total costs will be linear over the

relevant range, i.e. will appear as a straight line on the BE chart. This

is based on the idea that variable costs vary in direct proportion to

volume; the fixed costs remain unchanged, hence drawn as a straight

horizontal line on the graph within the relevant range; and that selling

price is constant.

3. In case of multiple product companies, the selling prices, costs and

proportion of units (sales mix) sold will not change. This cannot

always be correct. Sales mix ratio may be due to the change in the

consuming habits of customers. Selling prices of the individual

 products may likewise change due to competition, popularity and

stability of the products, etc.

4. There is no significant change in the inventory levels during the period

under review. Stated in another way, production volume is assumed

to be almost (if not exactly) equal to the sales volume, which causes

an immaterial (or none at all) difference between the beginning and

ending inventories.
What is Cost Volume Profit Analysis?
Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at
the impact that varying levels of costs and volume have on operating profit.
The cost-volume-profit analysis, also commonly known as break-even analysis,
looks to determine the break-even point for different sales volumes and cost
structures, which can be useful for managers making short-term economic
decisions. The cost-volume-profit analysis makes several assumptions,
including that the sales price, fixed costs, and variable cost per unit are
constant. Running this analysis involves using several equations for price, cost
and other variables, then plotting them out on an economic graph.
 Marginal Costing and Decision Making
The supreme goal of every management is to maximise profit. To achieve this
goal, management has to take several decisions regarding the marginal unit,
the product mix, the pricing, making and buying of any article and so on.
Marginal Costing also helps in ‘profit planning’ .Marginal Costing enables the
management to study different scenario (Cost and revenue situations) under
various alternatives. The management can plan it’s short-term profits
When marginal costing is useful for fixing price?
Marginal Costing helps the management in taking price decisions .In
absorption costing, the prices are fixed so as to cover the total cost which
includes fixed cost as well as variable cost. In marginal costing the price can
only be fixed on the basis of variable costs. This can be useful in the following
situations: When supply exceeds demand. b. Pricing of new products. c. Utility
Services. d. Cut- throat Competition in market. e. Export Orders or Special
Orders
1. Contribution
=Sales-Variable Cost
=Fixed Cost+ Profit
=Sales+ P.V Ratio
= (B.E Sales in units*Contribution Per units) +Profit
= (B.E Sales in value*PVR)+ Profit
=Fixed Cost+ (MS in units*Contribution Per unit)
=Fixed Cost+ (MS in value*PVR)
=Profit/MS in%
=Fixed Cost/B.E sales in %
2. Profit Volume Ratio (PVR)
=Sales-Variable Cost/Sales*100
=Contribution/Sales*100
=Fixed Cost+ Profit/Sales*100
=Fixed Cost +B.E Sales in value*100
=Fixed Cost+ B.E Sales in units*100/Selling Price per unit
=Profit/Margin of Safety in value*100
=Profit/Margin of Safety in units*100/Selling Price per unit
=Change in Profit/Change in Sales*100
=100-Variable Cost to Sales Ratio
3. B.E Sales in units
=Fixed Cost/Contribution Per Unit
=B.E Sales/Selling Price
=Fixed Cost/S.P per Unit-Variable Cost per unit
=Actual Sales per unit- Margin of Sales in units
4: B.E SALES IN VALUE
=Fixed cost /PVR
= Actual sales in value –margin of safety in value
=Fixed cost / contribution per unit * Selling price per unit
= BE Sales in units * Selling price per unit
= Fixed Cost /1- Variable Cost / Sales
= Fixed Cost /% of Contribution5
5. B.E SALES IN % OF SALES
= Fixed Cost / Contribution *100
= BE Sales / Actual Sales * 100
= 100 –margin of safety (in%)
 Types or Techniques of Costing
Following are the main types or techniques of costing for ascertaining costs:
1. Uniform Costing: It is the use of same costing principles and/or practices by
several undertakings for common control or comparison of costs.
2. Marginal Costing: It is the ascertainment of marginal cost by differentiating
between fixed and variable cost. It is used to ascertain the effect of changes in
volume or type of output on profit.
3. Standard Costing: A comparison is made of the actual cost with a pre-
arranged standard cost and the cost of any deviation (called variances) is
analysed by causes. This permits management to investigate the reasons for
these variances and to take suitable corrective action.
4. Historical Costing: It is ascertainment of costs after they have been incurred.
It aims at ascertaining costs actually incurred on work done in the past. It has a
limited utility, though comparisons of costs over different periods may yield
good results.
5.Direct Costing: It is the practice of charging all direct costs, variable and
some fixed costs relating to operations, processes or products leaving all other
costs to be written off against profits in which they arise.
6. Absorption Costing: It is the practice of charging all costs, both variable and
fixed to operations, processes or products. This differs from marginal costing
where fixed costs are excluded.
 MARGINAL COSTING EQUATIONS

1. Sales-variable Cost=Contribution
2. Contribution – Fixed Cost=Profit
3. Sales-Variable Cost=Fixed Cost+ Profit
4. Profit Volume Ratio=Contribution/Sales
5. Contribution=Sales*P.V Ratio
6. Sales=Contribution/P.V Ratio
7. B.E.P (in units) = Fixed Cost/Contribution per Unit
8. B.E.P (in rupees) = Fixed Cost/Contribution*Sales
9. B.E.P (in rupees) = Fixed Cost/P.V Ratio
10. Required Sales (in Rupees) = Fixed Cost+ Profit/P.V Ratio
11. Required Sales (in units) = Fixed Cost+ Profit/Contribution per Unit
12. Actual Sales=Fixed Cost+ Profit/P.V Ratio
13. Margin Of Safety (in rupees) = Actual Sales-B.E.P Sales
14. Margin Of Safety (in units) = Actual Sales(units)-B.E.P Sales(units).
15. Profit = Margin of Safety*P.V Ratio
 ABSORPTION COSTING PRO-FORMA

£ £

Sales Revenue xxxxx

Less Absorption Cost of Sales

Opening Stock (Valued @ absorption cost) xxxx

Add Production Cost (Valued @ absorption cost) xxxx

Total Production Cost xxxx

Less Closing Stock (Valued @ absorption cost) (xxx)

Absorption Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxxx

Absorption Cost of Sales (xxxx)

Un-Adjusted Profit xxxxx

Fixed Production O/H absorbed xxxx

Fixed Production O/H incurred (xxxx)

(Under)/Over Absorption xxxxx

Adjusted Profit xxxxx

Reconciliation Statement for Marginal costing and Absorption Costing
Profit

Marginal costing Profit Xx

ADD Xx
(Closing stock – opening Stock) x
OAR

= Absorption Costing Profit Xx

Where OAR( overhead absorption rate) =

Budgeted fixed production overhead

Budgeted levels of activities
 MARGINAL COSTING PRO-FORMA

£ £

Sales Revenue xxxxx

Less Marginal Cost of Sales

Opening Stock (Valued @ marginal cost) xxxx

Add Production Cost (Valued @ marginal cost) xxxx

Total Production Cost xxxx

Less Closing Stock (Valued @ marginal cost) (xxx)

Marginal Cost of Production xxxx

Add Selling, Admin & Distribution Cost xxxx

Marginal Cost of Sales (xxxx)

Contribution xxxxx

Less Fixed Cost (xxxx)

Marginal costing Profit xxxxx

 Problems

Q.1 The Vijay Electronic Co. furnishes you the following income information of the year

1995.

Year Sales in Rs Profit in

Rs

First half 4,05,000 10,800

………….. 5,13,000 32,400

Second half

…………..

From the above table you are required to compute the following assuming that the

fixed cost remains the same in both the periods.

(a) P/V Ratio.

(b) Fixed cost.

(c) Break - even point.

(d) Variable cost for first and second half of the year.

(e) The amount of profit or loss where sales are Rs 3,24,00.

(f) The amount of sales required to earn a profit of Rs 54,000.

Solution:

Year Sales in Rs Profit in

Rs

First half 4,05,000 10,800

………….. 5,13,000 32,400

Second half 1,08,000 21,600

…………..

Difference

…………..

(a) P/V Ratio = Change in Profit/ Change in Sales*100

= 21,600/1,08,000*100 =20%

(b) Fixed Cost

S*(S/V) = F+P

4,05,000*20/100 = F+10,800

Or 81,000 = F+10,800

Or 81,000-10,800 = Fixed Cost

Or Fixed Cost = Rs 70,200

Total Fixed Cost = 70,200*2= Rs 1,40,400

(c) Break-even Point = Fixed Cost/P/V Ratio

= 1,04,400/20% = Rs 7,02,000

(d) Variable Cost

(i) For the 1st half
 Sale – Variable Cost = Fixed Cost + Profit

Or 4,05,000-V.C. = 70,200 + 10,800

Or 4,05,000 -V.C. = 81,000

Or 4,05,000-81,000 = VC

Or VC = Rs 3,24,000

(ii) For the 2nd half

Sales-Variable Cost = Fixed Cost+ Profit

5,13,000-VC = 70,200+32,400

5,13,000-VC = 1,02,600

5,13,000-1,02,600 = VC

VC = Rs 4,10,400

(e) The amount of profit/Loss where sales are Rs 3,24,000

Sales*(P/V) = Fixed Cost + Profit

3,24,000*20% = 1,40,400+Profit/Loss

64,800 = 1,40,400+Profit/Loss

Loss = Rs 75,600

(f) The amount of Sales required to earn a profit of Rs 54,000

Sales*(P/V) = Fixed Cost + Profit

Sales*(20%) = 1,40,400+54,000

Sales*20/100 = 1,94,400

20% of Sales = 1,94,400*100/20 = Rs 9,72,00

Q.2 A manufacturer of packing cases makes three main types- Deluxe, Luxury, and

Economy. Overheads are incurred on the basis of labour hours. Wages are paid at Re

1.00 per hour. Estimates for the cases show the following:

Particulars Deluxe Luxury Economy

(Rs) (Rs) (Rs)

Material 10.00 8.00 3.00

Wages 6.00 3.00 2.00

Overheads 12.00 6.00 4.00

28.00 17.00 9.00

Net Profit/loss
2.00 3.00 3.00
Average Selling Price

26.00 20.00 12.00

Annual Sales ( Units)

10,000 20,000 5,000

The manufacture felt that he would be well advised to discontinue producing the

Deluxe and economy cases even though it would mean that some of production

facilities would remain unused. He cannot increase the sale of luxury cases. It has

been ascertained that 60% of the overheads is fixed.

You are required to advise the manufacture.

Solution: Statement of cost and contribution

Particulars Deluxe Luxury Economy

(Rs) (Rs) (Rs)

Material 10.00 8.00 3.00

Wages 6.00 3.00 2.00

Variable Overheads (40%) 4.80 2.40 1.60

Total Variable Cost

20.80 13.40 6.60
Selling Price
26.00 20.00 12.00

Contribution
5.20 6.60 5.40
Less: Fixed Cost (60%)
2.20 3.60 2.40
Net Profit / Loss

(-)2.80 3.00 3.00

P/V Ratio (Contribution*100)/Sales
5.20*100/26 6.60*100/20 5.4*100/12

=20% =33% =45%

Note: The above statement clearly explains that product Deluxe is incurring loss and

also its P/V Ratio is less as compared to other two products. Hence it is advisable, that

the manufacturer should discontinue the product “Deluxe” and increase the

production of products Luxury and economy.

 RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. It
may be understood as a science of studying how research is done scientifically.
So, the research methodology not only talks about the research methods but
also considers the logic behind the method used in the context of the research
study.
1. Research Design
Descriptive research is used in this study because it will ensure the
minimization of bias and maximization of reliability of data collected. The
researcher had to use fact and information already available through financial
statements of earlier years and analyse these to make critical evaluation of the
available material.
Hence by making the type of the research conducted to be both Descriptive
and Analytical in nature.
From the study, the type of data to be collected and the procedure to be used
for this purpose were decided.
2. Data Collection
The required data for the study are basically secondary in nature and the data
are collected for the audited reports of the company.
a) Primary Data:
Primary data are those data, which is originally collected afresh.
In this project, Websites and Books has been used for gathering required
information.
b) Sources of Data:
The sources of data are from the annual reports of the company from the year
2014 to 2018.
3. Methods of data Analysis

The data collected were edited, classified and tabulated for analysis. The
analytical tools used in this study.
 a) Analytical tool applied

The study employs the following analytical tools.

 Comparative statement

 Graph
 Trend percentage
 Ratio Analysis
ANNEXURE