Marginal Costing

APPLICATION OF MARGINAL COSTING IN SERVICE INDUSTRY

CHAPTER -1INTRODUCTION

Of

Marginal CostingMARGINAL COSTING (Definition and Meaning):

Marginal Costing is a principle whereby variable costs are charged to cost attributable to the relevant period is written off in full against contribution for that period. Marginal Costing is the ascertainment of cost and effect on profit of changes in volume or type of output by differentiating between fixed costs and variable cost.

In Marginal Costing, costs are classified into fixed and variable costs. The concept of marginal costing is based on the behavior of costs that vary with the volume of output. Marginal costing is known as variable costing, in which only Variable costs are accumulated and cost per unit is ascertained only on the basis of variable costs. Sometimes, Marginal Costing and Direct Costing are treated as interchangeable terms. The major difference between these two is that, Marginal Cost covers only those expenses which are of variable nature whereas direct cost may also include cost which besides being fixed in nature identified with cost objective.

The ICMA has defined marginal cost "as the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit." From the analysis of this definition it is clear that Increase/decrease in one unit of output increases/reduces the total cost from the existing level to the new level. This increase/decrease in variable cost from existing of the new level is called as marginal cost.

Marginal costing means "the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed and variables costs."

Marginal costing is not a method of costing. It is a technique of controlling by ringing out relationship between profit and volume.

Marginal Costing is the most controversial and interesting subject in cost counting. It is not actually a method of costing on the lines of any other form of gating, viz. job costing or process costing etc., but it is a special technique which present the management with information enabling it to measure the profitability of in under taking by considering the behavior. It clearly brings out the relationship between profit and volume of output which is helpful to the management for decision -making. Marginal costing may be used in conjunction with other costing methods like job or process costing or with other techniques such as standard costing or budgetary control. Marginal cost is nothing but variable cost. It is clearly imposed of all direct costs and variable overheads.

In U.S.A. the 'direct costing' or 'variable costing' is used to describe a technique which is for all practical purposes the equivalent of marginal costing.

OBJECTIVES OF MARGINAL COSTING:

1. To take decisions on important matters relating to the management.

2. To conduct profit-planning, which can be done from past records. ,

3. To find out the controllable and uncontrollable costs.

4. To fix the exact selling price of the product.FEATURES OF MARGINAL COSTING

All costs are categorized into fixed and variable costs. Variable cost per unit is same at any level of activity. Fixed costs remain constant in total regardless of changes in volume.

Fixed costs are considered period costs and are not included in product cost, only variable costs are considered as product costs.

Stock of work-in-progress and finished goods are valued at marginal cost of production.

In marginal process costing, products are transferred from one process to another are valued at marginal costs only.

Prices are determined with reference to marginal cost and contribution margin.

Profitability of departments, products etc. is determined with reference to their contribution margin.

In accounting marginal cost, the overhead control account in the cost ledger represents only the variable overhead. Fixed costs are taken as expenses in the profit and loss account and thus excluded from costs.

Presentation of data is oriented to highlight the total contribution and contribution from each product.

The difference in the magnitude of opening stock and dosing stock does not affect the unit cost of production since all the product costs are variable costs.

Segregation of costs into fixed and variable elements

In marginal costing all costs are segregated into fixed and variable elements and there is no third category of costs.

Marginal costs as products costs-Only marginal (variable) costs are charged to products-.

Fixed cost as period costs-Fixed costs are treated as period costs and are charged to costing Profit and Loss Account of the period in which they are incurred.

Valuation of inventory-The word in progress and finished stocks are valued at marginal cost only.

Contribution-Contribution is the difference between sales value and marginal cost of sales. The relative profitability of departments is based on a study of 'contribution' made by each of the products or departments.

Pricing-In marginal costing, prices are based on marginal cost plus contribution.

Marginal costing and profit

In marginal costing, profit is calculated by a two stage approach. First of all contribution is determined for each product or department. The contributions of various products or departments are pooled together and such a total of contribution from all products is called 'fund'. Then from this fund is deducted the total fixed cost to arrive at a profit or loss. This is illustrated below:

Fixed and Variable Costs:

The classification of costs into fixed and variable is of special interest and important in marginal costing. These two types of cost behave differently with changes in the volume of outputFixed Cost:Fixed cost means total of all fixed overheads. But it is important to note that in India, where1. Most of the labour force is on daily wages.2. Most of the labour cost consists of Dearness Allowance(DA).3. 'Retrenchment' and 'Lay-off' is not possible in the ordinary course of business.Labour cost is also sometimes treated as fixed and included in fixed costs. Treatment of fixed cost in marginal costing is very peculiar 'Fixed Costs' are also called as 'time costs', 'period costs', 'capacity costs','stand -by-costs' or 'constant costs'. Fixed costs are not concerned with the output level. They are rather period costs. During the given period, they are required to be incurred irrespective of the fact, whether the output is produced or not. Therefore, fixed costs are written-off to marginal cost profit and loss account. They are not included in cost of goods sold, neither in closing stock. At the end of the period, contribution (i.e. difference between sales and marginal cost) is credited to marginal costing profit and loss Account to which fixed costs are debited. The contribution first re-scopes Fixed cost and then earns profit. If fixed cost is more than contribution, then there is a loss.

VARIABLE COST: Variable Cost is the aggregate of Direct Material, Direct Labour and Direct Expenses and Variable Overheads (i.e. Prime Cost + Variable Over heads), Variable Cost in total is termed as 'Marginal Cost'. It is deducted from 5,1 sales and contribution is ascertained.

"Variable Cost is an operating expense, or a group of operating expenses that vary directly and in proportion to the level of activity, viz. sales or production. Examples are materials consumed, direct labour, power, sales commission, utilities, freight, packaging I.C.M.A. India.ARGUMENTS IN FAVOUR OF MARGINAL COSTING Fixed costs are period costs in nature and it should be charged to the concerned period irrespective of the quantum or level of production or sale.

Inclusion of fixed costs in the product cost distorts the comparability of products at different volumes and disturbs control actions. It highlights the significance of fixed costs on profits. In a highly competitive situation, it may be wise to take an order which covers marginal costs and makes some contribution towards fixed costs, rather than lose the order and the contribution by insisting upon a price above full cost. The difficulty in apportionment and absorption of fixed costs to product cost will not exist in contribution approach and it is much easier for accounting and determination of product costs. The problems of volume variance in a standard absorption costing system are overcome. In absorption costing, the under or over-absorbed fixed production overhead is represented by the volume variance. In businesses with large variations in stock levels and a high ratio of fixed costs absorption costing approach can lead to serious distortions in the profit figures. It is perfectly possible in these circumstances for profits to decline when sales increase and vice versa, and it is hard to explain with absorption costing what is happening or why profit planning and control are therefore made more difficult. With the marginal costing approach, stocks are valued at variable cost and there is no volume variance. Consequently, the relationship between sales volume and contribution is much easier to explain and understand.

Marginal cost method is simple in application and is easy for exercise of cost control. It is more informative and simple to understand.

It helps the management with more appropriate information in taking vital business decisions like make or buy, sub-contracting, export order pricing, pricing under recession, continue or discontinue a product/division/sales territory, selection of suitable product mix etc.

Profit-volume analysis is facilitated by the use break-even charts and profit-volume graphs, and so on.

The analysis of contribution per key factor or limiting resource is a useful aid in budgeting and production planning.

Pricing decisions can be based on the contribution levels of individual products.

The profit and loss statement is not distorted by changes in stock levels. Stock valuations are not burdened with a share of fixed overhead, so profits reflect sales volume rather than production volume.

Responsibility accounting is more effective when based on marginal costing because managers can identify their responsibilities more clearly when fixed overhead is not charged arbitrarily to their departments or divisions.

Practical applications of Marginal costing technique.The Marginal costing technique is useful in managerial decision making in the following situation: Profit planning

Contribution analysis

Break -even analysis

Cost-volume-profit analysis.

Contribution AnalysisThe analysis of the contribution per unit each product makes towards fixed or current periods costs and profit leads to the preparation of statements showing the total contribution each product class has made towards the recovery of period costs (that costs such as annual tooling and product advertising) which should be avoided if the product line were dropped.Contribution is the excess of selling price over variable costs. It is known as the contribution because it contributes towards recovery of the fixed costs and profits. By equation the concept of contribution can be stated as followsC=S-VWhere, C=ContributionS=SalesV=Variable Cost.Contribution is the difference between selling price and variable cost of sales. In marginal costing contribution is the base in the process of determining profitability of each product. When two or more products are manufactured net profit per product can't be ascertained as the fixed overhead are charged in total to the profit and loss account. Hence contribution per product plays a very important role in determining profitability of each product. It is a surplus generated by the product for recovery of fixed costs.Example:ParticularsProduct AProduct B

Selling Price per unitRs. 100Rs. 120

Less: Variable cost5080

Contribution Per Unit5040

Thus, though selling price of product B is higher than the selling price of product a contribution per unit of product B is less than of product A. usually selling price includes an element of profit. However, products may be sold at no profit no loss basis or sometimes may be at loss.

Therefore., the following equations can be used:

1. Contribution = Fixed Cost + Profit (Where product is sold at profit)2. Contribution = Fixed Cost (Where product is sold at profit)3. Contribution = Fixed Cost - Loss (Where a loss is incurred)F = Fixed Cost

P = Profit

C = ContributionIf any three factors are given, the fourth can be ascertained. The equation is also used for the ascertainment of "Break Even Point" (BEP) that. The point or level where there is no profit or no loss.

Profit Volume RatioThis is popularly known as P V Ratio,. It expresses the relationship between contribution and sales. It is expressed in percentage. PV ratio is given by the formulae:S- V X 100 = C.X100 s

s

Where, C = Contribution (being the difference between sales and variable costs)S = SalesV = Variable CostsPV Ratio can be determined by expressing change in profit or loss in relation to change in sales. PV Ratio indicates the relative profitability of different products, processes and departments. PV Ratio is most important in business. It is the indicator of the rate at which the organization in earning profit. A high ratio indicates a high profitability and a low ratio indicates low profitability. It is useful for calculating Break Even Point, profit at a given level of sales, sales required to earn a certain amount of profit, etc.Margin Of Safety:

It is the excess of present value over the break even sales.

Margin of safety indicates the strength of a business. High margin of safety indicates that profits will be earned even if there is a fall in the selling price. On the other hand if the margin of safety is small, a decline in sales value will be a matter of great concern to the management. In such a situation, management may be required to take the following decision Increase the selling price,

Increase the level of activity,

Reduce costs,

Substitute the existing product with more profitable product.Margin of safety is also popularly known as M/'s. it is the excess of actual sale of production volume over the Break EvenBy formula Margin of safety could be stated as:1. M/s. - (sales. units- break even units).M/S. = ProfitP V Ratio2. M/s. is directly related to profit. This is shown below:P = M/s X PV Ratio.If the margin of safety is large the business prospect are strong. As against this, if the margin of safety is small, the business prospects are weak. The margin of safety indicates the profitability. The margin of safety could be improved by increasing the selling price, which improves sales revenue or by reducing the costs.

Break-Even And CVP AnalysisBreak-even analysis refers to ascertainment of level of operations where total revenue equals to total costs. It is an analysis used to determine the probable profit or loss at any level of operations. Break-even analysis in a method of studying the relationship among sales revenue, variable cost and fixed cost to determine the level of operation at which all the costs are equal to its sales revenue and it is the no profit no loss situation. This is an important technique used in profit planning and managerial decision making. Break-even Point is the point at which total revenue is equal to total cost. It is the level of output (or sale) where there is no profit no loss. At this stage contribution is just sufficient to absorb fixed cost. The organization starts earning profit when the output or sales activity crosses this point. Output or sales below this point result in the loss. BEP can be calculated by the following formula:

In terms of output =Fixed CostContribution per unitIn terms of Sales Value =Fixed CostP V RatioAssumption of Break Even Analysis:1. Costs can be classified into fixed and variable categories.2. Fixed costs remain fixed for the entire volume.3. Variable costs change according to the change in output.4. Selling price per unit remains the same for the entire volume.Uses of Break Even Analysis:1. It facilitates determination of selling price which will give the desired profits.2. 1t makes it possible to divide the sales volume to cover a given rate of return on capital employed.3. The management can forecast profit and volume at levels of 4 activity.4. 1t suggests to make a change in sale mix.5. 1t helps management to do inter-firm comparison of profitability.6. 1t shows the impact of changes in costs on profits.7. 1t enables the management to plan for the optimum utilization of capacity. Limitations of Break Even Analysis:1. Break Even Analysis is based on the assumption that costs can be classified into fixed and variable categories. In practice it is very difficult to have such a clear cut distinction between fixed and variable cost. These are certain costs which cannot be classified accurately.2. It assumes that fixed cost remains constant however, in practice it may change.3. Variable costs may not vary in direct proportion to the volume.4. Selling price may not remain constant.5. The assumption that only one product is produced, does not hold true in practice.6. The assumption regarding production and sales does not realize in practice.

COST -VOLUME -PROFIT ANALYSIS:Cost -Volume -Profit(CVP) analysis is an important tool that provides the management with useful information for managerial planning and decision-making. Profit of a business firm are the result of interaction of many factors. Such factors determine, whether we have profits or losses and whether profits increase or decrease over-time.Cost-Volume-Profit (CVP) analysis is a systematic method of examining the relationships between selling prices, total sales revenue, volume of production, expenses and profit. This analysis simplifies the real global conditions that a business enterprise is likely to face. CVP analysis can play an important role by providing the management with information regarding the financial results if a specified level of activity or volume fluctuates.

The success of a business is measured in terms of profit and profit is dependent on three basic factors:a) Cost of productionb) Selling pricesc) Volume of salesThese three factors are inter-dependent because cost determines selling price to arrive at the desired level of profit; the selling price affects the volume of sales, the volume of sales directly affects the volume of production and volume of production in turn influences cost. An understanding of the inter-relationship between these factors is extremely useful to management in budgeting and profit planning. This is because C.V.P. Analysis helps in predicting the probable effects of change in any of these factors on the remaining factors.

3.15 Break Even ChartThe break even chart is a graphical representation of marginal costing. It indicates the graphic relationship between costs, volume and profits. It shows not only the BEP but also the effects of costs and revenue at varying levels of sales. Therefore, it can be more appropriately called as the Cost Volume Profit Graph (CVP graph). Thus, the break-even chart indicates the following information Fixed Cost,

Variable Costs,

Total Cost,

Sales Value,

Profit or Loss,

Break-Even Point,

Margin of Safety.

CHAPTER 2RESEARCH

METHODOLOGYMeaning:

Research in common language refers to search for knowledge. One can also define research as a scientific and systematic search for relevant information on a specific topic. In fact, research is an art of scientific investigation. Research can also be considered as a movement from the known to the unknown. It is a voyage of discovery.

Research is thus an original contribution to the existing stock of knowledge making for its advancement. It is perceived of truth with the help of study, observation, comparison and experiment. In short, the search of knowledge through objective and systematic method of finding solution to a problem in research.

Nature

This research is based on primary data collected from above mentioned company. Hence it depends on the data supplied by the company for the research. Limitations

Certain original statements and copies are not attached due to the policy of company. Interview was conducted only with account manager and not with employees of the firm . Hence the facts are based on information gives by account manager.The sources of information are generally classified as:

Primary Data

Secondary DataPrimary Data:

All information collected or generated by the researcher for the purpose of the project immediately at hand. In other words, the primary data refers to the observations, measurements, answers, information which the investigator collect for the purpose of the research.

It is the data, which is collected for the first time by the researcher, from the original source.

Primary Data of the Project Field investigation was done by visiting to the company.

Interview with the account manager.

Secondary data

As secondary source the data is collected through the reference books, internet Reports on marginal costing carried by the investigators were observed and studied. Collected different statements of the company for study of the marginal costing.

Method of sample selection: Method is carried through the observation and interview methodCHAPTER 3

COMPANY PROFILE

INTRODUCTION OF THE COMPANY

Company Profile

a) Name :-

Travel Time Car Rentals Pvt Ltd

b) Address :-

B Wings, Astral Court, Aundh, Pune : 411 007

c) Nature of Business :-

Renting vehicles on hire charges

d) Number of years of business :-

Since last 10 years

e) Clients:-

Software Companies like Infosys Ltd, TCL etc., Multinational and manufacturing companies.

Vision of company:

Vision: To be the most Safe, Reliable and Supportive travel service provider in the industry.

Mission of company:

Mission: To provide timely, effective and safe, transport

Core Values:

Be responsible towards the society we live in by providing an environment-friendly fleet of vehicles.

Being creative and consistent in our services.

Train and maintain quality staff to guarantee the safety and comfort of our customers.

Logistics and planning are essentially the most important aspects of an efficient transport system, especially felt in large corporations. By providing an unequalled level of quality service that stresses SAFETY, RELIABILITY and SUPPORT. In order to achieve our mission, TRAVELTIME has consistently recruited the most experienced drivers in the industry. We conduct scheduled vehicle inspections and driver training programs to ensure that each passenger travels safely and securely when using our Service.

HISTORY OF COMPANY:

The owners of the company have started this line of business in the year 1994 as a sole proprietary business. As business increased in the volume and the proprietor converted the business into Private Ltd Company namely Travel Time Car Rentals Pvt Ltd from 2006.Now the business is run as private limited company.

SERVICES BY THE COMPANY

Radio cap

Technology Makes Magic Possible At Traveltime, all our radio cabs are

equipped with mobile phones and GPS tracking systems which makes it easier

and faster to cater to our customer's requirement. When you call for a cab, the

nearest available cab is tracked and sent to you, saving you time and earning us

a customer.

You can book a cab online or over the phone. Features like Live Chat will

connect you straight to our customer care executive, who is always there to answer your queries and make your journey hassle free.

All our cabs are driven by experienced Trilingual drivers acquainted with all the three dialects of HINDI, MARATHI and ENGLISH, making your journey comfortable For we not only driven by your needs but also by the

clean fuel we use.

RENTAL CAR

Professionalism with a human touch.

Building on this philosophy, Traveltime has carved a niche' for itself as a reputed mass transport company in Pune. Apt use of technology, optimum and wise utilization of human resources, combined with an extra large fleet of vehicles, have helped us reach the pinnacle.

Equipped with an arsenal of comfort in various segments like:

Small Car Segment

Mid Size Car Segment

Premium Car Segment

High Capacity Vehicle

Luxury Car Segment

Uniformed drivers will greet you politely and hold the door open or load your luggage into the taxi. The driver will drive safely and smoothly while you read the local newspaper ensuring you arrive at your destination refreshed and relaxed. Whether it is a business trip or pleasure, your Traveltime Cab Service can provide local information on hotels, restaurants, the theatre or famous tourist spots.

The driver is knowledgeable on the local roads and will always use their expertise to avoid traffic congestion where possible and strive to deliver you to your destination on time.

Bus Service

We provide buses to most of the corporate in Pune. We have a well trained staff to take care of the backoffice operations, like taking the dump data, chalking the route of each bus to target the pickup of maximum employees. This makes our service cost effective and time effective for our clients. All our Corporate Buses are well maintained with neat and clean interiors and are equipped with GPS tracking system, which enables us to track the vehicles in real time.

We also provide buses for company events and outings.

Our Fleet of Buses consists of 17 Seater

25 Seater

27 Seater

32 Seater

40 Seater

49 seater

Traveltime has been proudly providing bus service to Puneites to travel anywhere across India for the last 15 years.ACTIVITIES OF THE COMPANY

At Traveltime we believe that Training is crucial for organizational development and success. It is extremely fruitful to both employers and employees of an organization. Keeping this is mind, we conduct various activities for our customer service executives, office staff, corporate staff, and also our drivers. These activities are designed in a way to help them better understand themselves, you, their work and also the business.

Following are some of the activities we enjoy as a family.

Communication Skills for our Customer Care Executives to help them understand and serve you better.

Road Safety for our team of drivers to help them understand how to be better drivers and responsible citizens.

Swine Flu Awareness and Immunization Programmed for all staff members.

Assurance Scheme - Chalak MalakThis is a scheme started by Traveltime to make our drivers the owners of their destiny.

CHAPTER 4

DATA COLLECTED & DATA ANALYSIS MARGINAL PROFITABILITY STATEMENT FOR EXISTING BUSINESS (1 BUSES, 48000 KMS. PER ANNUM)

PARTICULARSTOTAL/RS.PER KM/RS.

Hire Charges (Sales) @Rs.30 perkm.144000030.000

VARIABLE COST

l. Cost of diesel52980011.038

2.cost of oil184170.384

3. Repairs & maintenance (40%)240000.500

4. Tyre cost1320002.750

5. Business promotion cost (30%)27000.056

6. Other office cost (20%)7200.015

7.Depreciation1240002.583

TOTAL VARIABLE COST83163717.326

0.000

CONTRIBUTION60836312.674

MARGINAL PROFITABILITY STATEMENT FOR EXISTING BUSINESS (20 BUSES, 960000 KMS. PER ANNUM)

PARTICULARSTotal/RS.PER KM/RS.

Hire Charges (Sales) @Rs.30 per km.2880000030.000

VARIABLE COST

l.Cost of diesel1059600011.038

2.cost of oil3686400.384


4 Tyre cost26400002.750

5.Business promotion cost(30%)540000.056

6.0ther office cost(20%)144000.015




LESS: FIXED COST

l.RTO taxes640000

2.Drivers Salary1920000

3. Repairs & maintenance720000

4. Insurance640000

5. Admin. Expenses1200000

6. Business Promotion Exps.126000

7. Other office cost576005303600

ANALYSIS OF EXISTING BUSINESS OF THE COMPANYPARTICULARSREMARKS

1. P. V. RATIO

CONTRIBUTION

x100

SALES

12166960

----- x10042.25

28800000

2. BREAK EVEN POINT

a) IN RUPEES

FIXED COST

----------------x

P. V. RATIO

5303600

---------------xRS.12552900

42.25%

b) IN KILOMITERS

FIXED COST

---------------x

CONTRIBUTION PER .KM.

5303600

----------------------------418463 KMS

12.674

3. MARGIN OF SAFETY

a) IN PUPEES

SALE-B.E.P(RS)

28800000-12552900RS.16247100

b)IN KILOMITERS

SALES KM-B.E.P KM

960000-418463541537 KMS

4. PROFIT PERCENTAGE

RPOFIT6863360

-------------X100-------------X10023.83

SALES28800000

INFERENCE FOR EXISTING 20 BUSES

1. P. V. RATIO

The profit volume ratio for the existing 20 buses is 42.25%.

2. BREAK EVEN POINT

The break- even point, i.e. (Point of no profit no loss), is in terms of rupees is Rs 12552900.

The break- even points in terms of units (kms) is 418463kms.

3. MARGIN OF SAFETY

The company has achieved its margin of safety in units i.e, 541537kms. Corresponding to the unites the margin of safety in rupees is Rs. 16247100 .


Since the margin of safety of the company is Rs 16247100 , therefore the company has achieved its profit at 23.83%. MARGINAL PROFITABILITY STATEMENT FOR PROPOSED ADDITIONAL BUSINESS (10 BUSES, 288000 KMS. PER ANNUM)

PARTICULARSTOTAL/RS.PER KM/RS.

Hire Charges (Sales) @Rs.20 per km.576000020.000

VARIABLE COST

l. Cost of diesel317894411.038

2.Cost of oil1105920.384


4.Tyre cost7920002.75

5.Business Promotion cost(30%)161280.056

6.0ther office cost(20%)43200.015




INFERENCE FOR 10 BUSESAs fixed cost is a period cost it remains fixed for any level of business activity. Once fixed cost is recovered, it need not to be recovered from the additional business. Fixed cost is a non recurring cost, it would not incur again & again in the business. Hence for the purpose of analysis of the additional business and for decision making only variable cost should be considered as it is to be recovered from the contribution from new additional businessCOMBINED MARGINAL PROFITABILITY STATEMENT FOR EXISTING & NEW BUSINESS (20 BUSES, 960000 KMS. PER ANNUM) (10 BUSES, 288000 KMS. PER ANNUM ADDINAL BUSINESPARTICULARSEXISTING/RS.ADDITION/RSTOTAL/RS

Hire Charges(Sales)@Rs.30&Rs.20 p/km.28800000576000034560000

VARIABLE COST

l. Cost of diesel10596000317894413774944

2.Cost of oil368640110592479232

3. Repairs & maintenance (40%)480000144000624000

4.Tyre cost26400007920003432000

5.Business promotion cost(30%)540001612870128

6.0ther office cost(20%)14400432018720

7.Depreciation24800007439043223904

TOTAL VARIABLE COST16633040498988821622928

CONTRIBUTION1216696077011212937072

LESS : FIXED COST

l. RTO taxes640000

2.Drivers Salary1920000

3. Repairs & Maintenance720000

4. Insurance640000

5. Admin. Expenses1200000

6. Business Promotion Exps.126000

7. Other Office Cost57000

TOTAL FIXED COST5303600

PROFIT7633472

ANALYSIS OF TOTAL EXISTING & NEW BUSINESS OF THE COMPANY

PARTICULARSREMARKS

1. P. V. RATIO

CONTRIBUTION

x100

SALES

12937072

x10037.43

34560000

2. BREAK EVEN POINT

a) IN RUPEES

FIXED COST

------------------

P. V. RATIO

5303600

--------------RS.14169382

37.43%

b) IN KILOMITERS

FIXED COST

-------------------------

CONTRIBUTION PER KM

5303600511634 KMS

--------------------------

10.366

3. MARGIN OF SAFETY

a) IN RU PEES

ACTUAL SALES-B.E.P. SALES

34560000-14169382RS 20390618

b) IN KIL0M1TERS

ACTUAL SALES KMS-B.E.P KM

1248000-511634736366 KMS.


PROFIT

---------------X100

SALES

7633472

------------------X10022.09%

34560000

COMPARATIVE ANALYSIS OF DATA

PARTICULARSEXISTINGREVISEDIncreaseDecrease

1. P. V. RATIO42.25%37.434.82

2. BREAK EVEN POINT

a) IN RUPEESRS.12552900RS.14169382Rs.1616482

b) IN KILOMITERS418463 KMS.511634 KMS93171 kms

3. MARGIN OF SAFETY

a) IN RUPEESRS.16247100RS.20390618Rs.4143518

b) IN KILOMITERS541537 KMS736366KMS.194829 KMS

4.PRPOFIT PERCENTAGE23.83%22.09%1.74%

INFERENCE FOR COMPARITIVE TABLE 1. P. V. RATIO

Due to lesser margin i.e. contribution from the additional new business the existing P.V. Ratio 42.25 % has been reduced to 37.43% . The P.V.R. reduced by 4.82%.

2. BREAK EVEN POINT

Due to reduction in contribution per unit and reduction in PVR, BEP has been 14169382 i. e. by Rs.1616482 and also by 93171 Kms.

3. MARGIN OF SAFETY

The margin of safety also increased by Rs.1443518 due to increase in the sale as new proposal result into increase in the turnover of Rs.5760000.


Percentage of profit decreased by 1.74% because margin i.e. contribution from additional business is very less which affect the overall profitability of the business.

5. AMOUNT OF PROFIT

The amount of profit has increased by Rs.770112 because whatever contribution earned from additional business directly result into increase in the profit of the company as fixed cost is already recovered from contribution of existing business.

CHAPTER 5

SUGGESTION & CONCLUSIONSUGGESTIONIt is observed that the contribution per km. shall be decreased, if the new proposal for 10 buses on Saturday & Sunday. It also result into decease in the P.V. Ratio of the company. The B.E.P. Shall increased .

The recommendation given by the Accounts department is based on the basis of Absorption Cost sheet. But it is essential to analyze the proposal on the basis of Marginal cost Technique because the fixed costs once recovered from the contribution of existing business need not to be recovered from the contribution earned from the additional new business.

The recommendation from Business Promotion Department is merely states that the business will increase without disturbing the existing business. The department has not made any calculation to prove or support it's recommendation.I would like recommend the management of the company that even though the P.V. Ratio and contribution decreases on accepting the offer for new additional business from the educational institute the proposal should be ACCEPTED.

As fixed cost is a period cost it remains fixed for any level of business activity. Once fixed cost is recovered, it need not to be recovered from the additional business. Fixed cost is a non recurring cost, it would not incur again & again in the business. The Accounts Department had analyzed the proposal on the basis of total cost per km. which is Rs.22.85. This analysis shall not proved useful for decision making because fixed cost once recovered need not to recover again from the contribution of additional business. Hence for the purpose of analysis of the additional business and for decision making only variable cost should be considered as it is to be recovered from the contribution from new additional business.

From analysis of proposed additional business it is clear that the proposed business shall give hire charges of Rs.20 and variable cost per km. is Rs.17.32. The proposed business shall give contribution of Rs.2.68 per km. This contribution directly results into increase in the profit of the company because fixed cost is already recovered from the existing business of the company. Hence total contribution from new business of Rs. 770112/- helps to increase the profit of the company by Rs.770112/-

The company can increase it's profit by Rs.770122 without disturbing existing business . Hence the proposal should be ACCEPTED.CONCLUSIONAt the conclusion I would like conclude that once the fixed cost is recovered , then it need not to be recovered from the contribution of additional sales. In short fixed cost is recovered from BEP sales and it not to recovered from contribution of sales above BEP sales i.e. margin of safety sales. Only variable costs are to be recovered from the contribution of the sales more than BEP sales. Hence whenever selling price is more than variable cost it always contribute to the profit of the company.

In case of this company, the additional business proposal gives hire charges of Rs.20 per km. and the variable cost to run the buses for this additional business is only Rs. 17.32. It means this proposal give contribution of Rs.2.62 per km. The total proposed additional running kms are estimated 288000 which give total contribution of Rs.770112, will increase the profit of the company by Rs.770112/- as the BEP sales limit is already crossed by the company and fixed cost is already recovered by the company from the contribution earned from BEP sales.

At last I conclude that Marginal Cost Technique is very useful technique for the management to analyze the data in a effective and useful manner and to take a correct decision.

APPENDIX

TABLE NO -1

GRAPH NO -1

INFERENCE:In the above graph 'tc' is the total cost line and 'sp' is the selling price line ,and 'fc' is the fixed cost which remains same at all the levels of the output, and 'vc' is the variable cost which continuously changing according to the level of the output.

At 420,000 level of the output, total cost is intersecting the selling price and the company is achieving its break-even point (BEP). After the BEP the total cost line is below the selling price which shows that the company is earning profit.

The Marginal Of Safety of the company is achieved from the 420,000 level till 440,000 level of the output respectively.

TABLE NO-2

GRAPH NO-2

INFERENCE:In the above graph 'tc' is the total cost line and 'sp' is the selling price line ,and 'fc' is the fixed cost which remains same at all the levels of the output, and 'vc' is the variable cost which continuously changing according to the level of the output.

At 500,000 level of the output, total cost is intersecting the selling price and the company is achieving its break-even point (BEP). After the BEP the total cost line is below the selling price which shows that the company is earning profit.

The Marginal Of Safety of the company is achieved from the 500,000 level till 540,000 level of the output res

BIBLOGRAPHY

REFERENCE BOOKS:1) Marginal Costing by , F.C.LAWRENCE,M.C

2Advance cost accounting . M.G.PATKAR3) Cost accounting . JAMSHID.ESKANDARI4) Cost accounting . REZA DARGAHI

Marginal Costing

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