mathematics for OPENMAT MAT CAT GMAT

MARGINAL COSTING & PROFIT PLANNING : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 1 www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS MARGINAL COSTING & PROFIT PLANNING AFTERSCHO?OL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’ Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL

MARGINAL COSTING & PROFIT PLANNING : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 2 www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS MARGINAL COSTING & PROFIT PLANNING Dr. T.K. Jain. AFTERSCHO?OL Centre for social entrepreneurship Bikaner M: 9414430763 tkjainbkn@yahoo.co.in www.afterschool.tk, www.afterschoool.tk

What is absorption costing ? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 3 What is absorption costing ? It is also called full costing, or traditional method of costing. Here we determine the cost of the product on the basis of both fixed and variable costs. Here all costs are identified with the manufactured product.

Marginal costing? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 4 Marginal costing? It is the system of costing, where we take only variable costs in consideration. When we are calculating the cost of a product, we are taking into account only variable cost of the product – not the fixed cost of the product.

Differences between marginal costing and absorption costing? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 5 Differences between marginal costing and absorption costing? When we are computing the value of work in progress and finished goods, we take into account works cost and total cost of production respectively in absorption costing, but in marginal costing, we take into account only variable costs. Thus closing stock will be undervalued in the case of marginal costing.

Differences between marginal costing and absorption costing? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 6 Differences between marginal costing and absorption costing? In case of absorption costing, we take into account the total costs

Jitu Ltd. produces one standard type of article. The result of the last 4 months as follows:Output (Units)1 200 2 3003 400 4 600Prime cost is Rs. 10 per unit. Variable expenses are Rs. 2 per unit. Fixed expenses as36000 per annum. Find out cost per unit of each month. : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 7 Jitu Ltd. produces one standard type of article. The result of the last 4 months as follows:Output (Units)1 200 2 3003 400 4 600Prime cost is Rs. 10 per unit. Variable expenses are Rs. 2 per unit. Fixed expenses as36000 per annum. Find out cost per unit of each month. Fixed cost per month : 3000. formula: fixed cost per unit + variable cost per unit. the cost per unit : 1: (3000/200) +10+2 = 27; 2: (3000/300) + 10+2 = 22 per unit, so on….

Sales of a product amount to 200 units per month at Rs. 10 per unit. Fixed overhead is Rs. 400 per month and variable cost Ps. 6 per unit. There is a proposal to reduce price by 10%. Calculate the present and future P/V ratios and find by applying P/V ratios, how many units must be sold to maintain total profit. : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 8 Sales of a product amount to 200 units per month at Rs. 10 per unit. Fixed overhead is Rs. 400 per month and variable cost Ps. 6 per unit. There is a proposal to reduce price by 10%. Calculate the present and future P/V ratios and find by applying P/V ratios, how many units must be sold to maintain total profit. PV ratio = contribution / price * 100 Contribution = 10 – 6 = 4 per unit PV R=40% Total profit = 400. In order to maintain profit, New contribution = 9 – 6 = 3 per unit. Profit=contribution – fixed cost. sales required : 3X – 400 = 400 or X = 267 New PV ratio = 3/9 * 100 = 33.33%

Based on the following information calculate the break-even point and the turnover required to earn a profit of Rs. 36,000.Fixed overheads Rs. 1,80,000Variable cost per unit 2Selling price per unit 20If the company is earning a profit of Rs. 36,000, express the ‘margin of safety’ available to it ? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 9 Based on the following information calculate the break-even point and the turnover required to earn a profit of Rs. 36,000.Fixed overheads Rs. 1,80,000Variable cost per unit 2Selling price per unit 20If the company is earning a profit of Rs. 36,000, express the ‘margin of safety’ available to it ? Sales volume at target profit = (Fixed cost + target profit) / contribution per unit = (180000+36000) / (20 – 2) = 12000 units or Rs. 240000 (in amount) BEP = (180000/(20-2)) = `10000 units or Rs. 200000 Margin of safety= sales – BEP level or (Sales – BEP) / Sales *100 Thus margin of safety = 40000 or 16.7% answer.

ASU furnishes you the following information:Year 1996 First half Second halfSales Rs. 8,10,000 Rs. 10,26,000Profit earned Rs. 21,600 64,800Prom the above you are required to compute PV ratio assuming that the fixed costremains the same in both the periods : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 10 ASU furnishes you the following information:Year 1996 First half Second halfSales Rs. 8,10,000 Rs. 10,26,000Profit earned Rs. 21,600 64,800Prom the above you are required to compute PV ratio assuming that the fixed costremains the same in both the periods PV Ratio = change in profit / change in sales * 100 = (64800- 21,600 )/ (10,26,000-8,10,000) * 100 = 20% answer

At the budgeted activity of 75% of total capacity, a company earns a P/V ratio of 25% aprofit of 10% on sales. During the course of the year the company had to reduce its price of the product by 10% due to recession. The company was able to only 50% of its capacity- The sales value at this level was Rs. 13,50,000 at the reduced price of Rs. 9 per unit. Due to reduction in production the actual variable costs went up by 2% of the budget. What is BEP at original and reduced price ? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 11 At the budgeted activity of 75% of total capacity, a company earns a P/V ratio of 25% aprofit of 10% on sales. During the course of the year the company had to reduce its price of the product by 10% due to recession. The company was able to only 50% of its capacity- The sales value at this level was Rs. 13,50,000 at the reduced price of Rs. 9 per unit. Due to reduction in production the actual variable costs went up by 2% of the budget. What is BEP at original and reduced price ?

Solution… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 12 Solution… Sales at 50% = 1350000 Sales at 100% = 2700000 Sales at 100% at original price = 2700000*100/90 = 3000000 Budget level: 2250000 Contribution = 562500 Profit = 225000 Fixed cost = (562500- 225000) =337500 BEP level at original = 337500/.25 =Rs1350000 BEP level at reduced price level =337500/.1666 = Rs. 2025810 answer.

What is fixed cost… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 13 What is fixed cost… The cost that you have to incur whatever may be the business volume. Even if the production goes up or falls down – the fixed costs remain the same. Thus this is the cost which will always remain at the same level – irrespective of sales volume or production.

What is variable cost? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 14 What is variable cost? This is cost which varies with production. If production goes up, this cost will also go up. The per unit cost will remain stable. For Example, if per unit variable cost is 20, it will remain 20 even if you double the production. (there are semivariable expenses also – which do donot vary in the same proportion).

What is contribution…. : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 15 What is contribution…. Sales – Variable cost is called contribution.

How do you calculate BEP? : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 16 How do you calculate BEP? There are two ways – BEP in volume (in units) BEP in money terms (in Rupees)

BEP in Units… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 17 BEP in Units… The formula : = Fixed Cost / (Contribution per unit)

BEP in Amount (in Rupees) : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 18 BEP in Amount (in Rupees) = Fixed Cost / P.V. Ratio P.V. Ratio : = Contribution / Sales * 100

Example…. : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 19 Example…. If the fixed cost is Rs. 10000 and selling price per unit is Rs. 10, and variable cost per unit is Rs. 6, what is the BEP in units? Solution: Fixed cost / contribution per unit = 10000/(10 – 6) = 2500 units.

Example… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 20 Example… If the fixed cost is Rs. 10000 and selling price per unit is Rs. 10, and variable cost per unit is Rs. 6, what is the BEP in Amount (Rupees)? Solution: Fixed cost / PV Ratio PV Ratio = 4 / 10 * 100= 40% BEP = 10000 / 40% = 25000 Rupees amount.

Calculate BEP from the following… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 21 Calculate BEP from the following… Selling price Rs. 20 per unit Variable manufacturing costs=11 per unit Variable selling costs=3 per unit Fixed factory overheads=5,40,000 per yr Fixed selling costs 2,52,000 per year

Solution… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 22 Solution… BEP = Fixed Cost / Contribution per unit =7,92,000 / 6 = 132,000 units

A company has fixed expenses of Rs. 90,000 with sales at Rs. 3,00,000 and a profit of Rs 60000 Calculate the profit/volume ratio : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 23 A company has fixed expenses of Rs. 90,000 with sales at Rs. 3,00,000 and a profit of Rs 60000 Calculate the profit/volume ratio Contribution = sales – Variable cost Total cost = 3 lakh- 60000 = 2.4 lakhs Variable cost = 2,40,000-90000 = 150000 P.V. Ratio= C/ S * 100 (150000/300000) * 100 = 50% answer.

Xyz makes 10,000 units of a product at a cost of Rs. 4 per unit and there is home market for consuming the entire volume of production at the sale price ofAs. 4.25 per unit. In the year 2008, there is a fall in the demand for home market which can consume10,000 units only at a sale price of As. 3.72 per unit. The analysis of the cost per 10,000 units is:Materials rs. 15,000 Wages 11,000Fixed overheads 8,000 Variable overheads 6,000The foreign market is explored and it is found that this market can consume 20,000 units of the product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional 10,000 units of the product (over initial 10,000 units) that fixed overheads will increase by 10 per cent. : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 24 Xyz makes 10,000 units of a product at a cost of Rs. 4 per unit and there is home market for consuming the entire volume of production at the sale price ofAs. 4.25 per unit. In the year 2008, there is a fall in the demand for home market which can consume10,000 units only at a sale price of As. 3.72 per unit. The analysis of the cost per 10,000 units is:Materials rs. 15,000 Wages 11,000Fixed overheads 8,000 Variable overheads 6,000The foreign market is explored and it is found that this market can consume 20,000 units of the product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional 10,000 units of the product (over initial 10,000 units) that fixed overheads will increase by 10 per cent.

Bardia’s Solution… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 25 Bardia’s Solution… Total fixed cost now = 8800 Selling price = 3.55 and 3.72 Variable cost = 3.2 per unit Total variable cost = 30000 * 3.2= 96000 Total Fixed cost = 8800 Total Cost = 104800 Sales = 3.72*10000 + 3.55*20000 = 108200 Thus there will be profit of 3400. Ans.

A company purchased a machine two years ago at a cost of Rs. 60,000. The equipment has no salvage value at the end of its six years, useful life and the company is charging depreciation according to straight-line method. The company learns that a new equipment can be purchased at a cost of Rs. 80,000 to do the same job and having an expected economic life of 4 years without any salvage value. The advantage of the new machine lies in its rester operating efficiency which will reduce the variable operating expenses from the present level of Rs. 1,65,000 to Rs.1 30,000 per annum. The sales volume is expected to continue at Rs.2 lacs per annum for the next four years. Rate= 20% : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 26 A company purchased a machine two years ago at a cost of Rs. 60,000. The equipment has no salvage value at the end of its six years, useful life and the company is charging depreciation according to straight-line method. The company learns that a new equipment can be purchased at a cost of Rs. 80,000 to do the same job and having an expected economic life of 4 years without any salvage value. The advantage of the new machine lies in its rester operating efficiency which will reduce the variable operating expenses from the present level of Rs. 1,65,000 to Rs.1 30,000 per annum. The sales volume is expected to continue at Rs.2 lacs per annum for the next four years. Rate= 20%

Vyas’s solution… : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 27 Vyas’s solution… Incremental saving in cost = 35000 Increased Depreciation = -10000 Net savings per annum = 25000 (we can also reduce interest burden and add tax benefits resulting from this change). PV analysis – Money invested = 80000 – sale price of old machine Expected return per annum we are able to recover this money in 4 years. If we look at the present value @ 20%, we are able to get : 64718 as the present value. Thus if we get 16000 from old machine, the change in machine is a good idea.

Two competing food vendors BIKAJI (a) and Bhikharaam (B) were located side by side at a fair. B occupied buildings of the same size, paid the same rent, Rs.1 250, and charged similar prices t their foods. Vendor a employed three times as many employees as B and had twice as much income as B even though B had more than half the sales of A. Other data are as follows Vendor A Vendor B Sales Rs. 8,000 Rs. 4,500Cost of goods sold 50 % of Sales Wages Rs. 2,250 Rs.l 750 Explain why vendor A is twice as profitable as Vendor B. : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 28 Two competing food vendors BIKAJI (a) and Bhikharaam (B) were located side by side at a fair. B occupied buildings of the same size, paid the same rent, Rs.1 250, and charged similar prices t their foods. Vendor a employed three times as many employees as B and had twice as much income as B even though B had more than half the sales of A. Other data are as follows Vendor A Vendor B Sales Rs. 8,000 Rs. 4,500Cost of goods sold 50 % of Sales Wages Rs. 2,250 Rs.l 750 Explain why vendor A is twice as profitable as Vendor B.

Goti & Bardia’s answers : 

www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 29 Goti & Bardia’s answers Bikaji is twice as profitable because it is having lower fixed expenses as % of total sales. Just look at the data : A = (1250+2250)/8000 *100 = 43% B = (1250+1750)/4500 * 100 = 66% Profits are A : 8000-(4000+1250+2250)=500 B: = 4500 – (2250+1750+1250)= -750 Thus A is more profitable due to better operating leverage. Answer.

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www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 30 About AFTERSCHO?OL PGPSE - World’s most comprehensive programme on social entrepreneurship – after class 12th Flexible – fast changing to meet the requirements Admission open throughout the year Complete support from beginning to the end – from idea generation to making the project viable.

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www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 31 Branches of AFTERSCHO?OL PGPSE programme is open all over the world as free online programme. Those who complete PSPSE have the freedom to start branches of AFTERSCHO?OL A few branches have already started - one such branch is at KOTA (Rajasthan).

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www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 32 Workshop on social entrepreneurship We conduct workshop on social entrepreneurship – all over India and out of India also - in school, college, club, association or any such place - just send us a call and we will come to conduct the workshop on social entrepreeurship. These workshops are great moments of learning, sharing, and commitments.

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www.afterschoool.tk AFTERSCHO?OL's MATERIAL FOR PGPSE PARTICIPANTS 33 FREE ONLINE PROGRAMME AFTERSCHO?OL is absolutely free programme available online – any person can join it. The programme has four components : 1. case studies – writing and analysing – using latest tools of management 2. articles / reports writing & presentation of them in conferences / seminars 3. Study material / books / ebooks / audio / audio visual material to support the study 4. business plan preparation and presentations of those plans in conferences / seminars

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