Project Rough Copy

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1.1Introduction

Every manufacturing firm desires to increase its volume of production in order to

increase its profits. Since this decision involves additional cost, therefore, afirm has to analyze

and understand the behavior of additional output decisions. This is essential because every

increase in the level of output would not increase profits but would diminish the firms marginal

profit if it is already at its optimum level of existing operation. However, such a decision would

definitely prove financially worthy if there exits any unutilized operational capacity. Thus to

reach at accurate decision management must know how costs will react to changes in activity

.The analysis of cost behavior reveals that the cost of a product can be divided in to two major

categories

1. Fixed cost

2. Variable cost.

As per cost behavior, fixed cost remains constant to a particular level of output whereas

variable cost has tendency to change proportionately with the volume of output.

Cost

Cost is the amount of expenditure (actual) incurred on or attributable to , a specified thingor activity.

Cost accounting

Meaning

It is a method of accounting for cost. The process of recording and accounting for all the

elements of cost is called cost accounting.

Definition

The official terminology of the chartered institute of management accountants (CIMA),

London, defines cost accounting as the establishment of budgets, standard costs and actual cost

of operations, activities or products and the analysis of variances, profitability or the social use of

funds.


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Objectives of Cost Accounting

1. Determining Selling Price

Business enterprises run on a profit-making basis. It is, thus, necessary that revenueshould be greater than expenditure incurred in producing goods and services from which

the revenue is to be derived. Cost accounting provides various information regarding the

cost to make and sell such products or services. Of course, many other factors such as the

condition of market, the area of distribution, the quantity which can be supplied etc. are

also given due consideration by management before deciding upon the price but the cost

plays a dominating role.

2. Determining and Controlling EfficiencyCost accounting involves a study of various operations used in manufacturing a product

or providing a service. The study facilitates measuring the efficiency of an organization

as a whole or department-wise as well as devising means of increasing efficiency.

Cost accounting also uses a number of methods, e.g., budgetary control, standard costing

etc. for controlling costs. Each item viz. materials, labor and expenses is budgeted at the

commencement of a period and actual expenses incurred are compared with budget. This

greatly increases the operating efficiency of an enterprise.

3. Facilitating Preparation of Financial and Other StatementsThe third objective of cost accounting is to produce statements whenever is required by

management. The financial statements are prepared under financial accounting generally

once a year or half-year and are spaced too far with respect to time to meet the needs of

management. In order to operate a business at a high level of efficiency, it is essential for

management to have a frequent review of production, sales and operating results. Cost

accounting provides daily, weekly or monthly volumes of units produced and

accumulated costs with appropriate analysis. A developed cost accounting system


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provides immediate information regarding stock of raw materials, work-in-progress and

finished goods. This helps in speedy preparation of financial statements.

4. Providing Basis for Operating PolicyCost accounting helps management to formulate operating policies. These policies may

relate to any of the following matters:

o Determination of a cost-volume-profit relationshipo Shutting down or operating at a losso Making for or buying from outside supplierso Continuing with the existing plant and machinery or replacing them by improved

and economic ones

Elements of Cost

Following are the three broad elements of cost:

1. MaterialThe substance from which a product is made is known as material. It may be in a raw or a

manufactured state. It can be direct as well as indirect.

a. Direct MaterialThe material which becomes an integral part of a finished product and which can be

conveniently assigned to specific physical unit is termed as direct material. Following are some

of the examples of direct material:

All material or components specifically purchased, produced orrequisitioned from stores

Primary packing material (e.g., carton, wrapping, cardboard, boxes etc.) Purchased or partly produced components


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Direct material is also described as process material, prime cost material,

production material, stores material, constructional material etc.

b. Indirect MaterialThe material which is used for purposes ancillary to the business and which

cannot be conveniently assigned to specific physical units is termed as indirect

material. Consumable stores, oil and waste, printing and stationery material etc.

are some of the examples of indirect material.

Indirect material may be used in the factory, office or the selling and distribution

divisions.

2. LaborFor conversion of materials into finished goods, human effort is needed and such human

effort is called labor. Labor can be direct as well as indirect.

a. Direct LaborThe labor which actively and directly takes part in the production of a particular

commodity is called direct labor. Direct labor costs are, therefore, specifically and

conveniently traceable to specific products.

Direct labor can also be described as process labor, productive labor, operating

labor, etc.

b. Indirect LaborThe labor employed for the purpose of carrying out tasks incidental to goods

produced or services provided, is indirect labor. Such labor does not alter the

construction, composition or condition of the product. It cannot be practically

traced to specific units of output. Wages of storekeepers, foremen, timekeepers,

directors fees, salaries of salesmen etc, are examples of indirect labor costs.


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Indirect labor may relate to the factory, the office or the selling and distribution

divisions.

3. ExpensesExpenses may be direct or indirect.

a. Direct ExpensesThese are the expenses that can be directly, conveniently and wholly allocated to

specific cost centers or cost units. Examples of such expenses are as follows:

Hire of some special machinery required for a particular contract Cost of defective work incurred in connection with a particular job or

contract etc.

Direct expenses are sometimes also described as chargeable expenses.

b. Indirect ExpensesThese are the expenses that cannot be directly, conveniently and wholly allocated

to cost centers or cost units. Examples of such expenses are rent, lighting,

insurance charges etc.

4. OverheadThe term overhead includes indirect material, indirect labor and indirect expenses. Thus,

all indirect costs are overheads.

A manufacturing organization can broadly be divided into the following three divisions:

o Factory or works, where production is doneo Office and administration, where routine as well as policy matters are decidedo Selling and distribution, where products are sold and finally dispatched to

customers


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Overheads may be incurred in a factory or office or selling and distribution divisions.

Thus, overheads may be of three types:

d. Factory OverheadsThey include the following things:

Indirect material used in a factory such as lubricants, oil, consumablestores etc.

Indirect labor such as gatekeeper, timekeeper, works managers salary etc. Indirect expenses such as factory rent, factory insurance, factory lighting

etc.

e. Office and Administration OverheadsThey include the following things:

Indirect materials used in an office such as printing and stationerymaterial, brooms and dusters etc.

Indirect labor such as salaries payable to office manager, officeaccountant, clerks, etc.

Indirect expenses such as rent, insurance, lighting of the officef. Selling and Distribution Overheads

They include the following things:

Indirect materials used such as packing material, printing and stationerymaterial etc.

Indirect labor such as salaries of salesmen and sales manager etc. Indirect expenses such as rent, insurance, advertising expenses etc.


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Types of costs

1.Fixed Cost

Fixed costs are expenses that do not change in proportion to the activity of abusiness,within the relevant period or scale of production. For example, a retailer must pay rent

and utility bills irrespective of sales.

A company will pay for line rental and maintenance fees each period regardless of how

much power gets used. And some electrical equipment (air conditioning or lighting) may be kept

running even in periods of low activity. These expenses can be regarded as fixed.

2.Variable cost

Variable costs by contrast change in relation to the activity of a business such as sales or

production volume. In the example of the retailer, variable costs may primarily be composed of

inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable.

The company will use electricity to run plant and machinery as required. The busier the

company, the more the plant will be run, and so the more electricity gets used. This extra

spending can therefore be regarded as variable

3.Direct Costs, however, are costs that can be associated with a particular cost object. Not all

variable costs are direct costs, however; for example, variable manufacturing overhead costs are

variable costs that are not a direct costs, but indirect costs.

For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw

material is used, and so the spending for raw materials falls. When activity is increased, moreraw materials is used and spending therefore rises.


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4.Average cost

Average cost is equal to total cost divided by the number of goods produced.

5.Total cost/output

It is also equal to the sum of average variable costs (total variable costs divided by

Output)

6.Marginal cost

Meaning

Marginal cost is the change in total cost that arises when the quantity produced changes

by one unit. In general terms, marginal cost at each level of production includes any additional

costs required to produce the next unit. So, the marginal costs involved in making one more

wooden table are the additional materials and labour cost incurred.

Definition

According to the chartered institute of management accountants, London, marginal cost

means 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

Marginal costing

Meaning

It is techniques where only the variable costs are considered while computing the cost of

a product.

Definition

According to the chartered institute of management accountants, London, marginal

costing is a technique where only the variable costs are charged to cost units, the fixed costs are


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charged to cost units, the fixed costs attributable being written off in full against the contribution

for that period

contribution analysis

Estimating the selling prices and the direct (variable) costs of a range ofproducts, to

compute the extent to which each unit sold will pay for indirect (fixed) costs and contribute to

the net income. Contribution analysis shows whether or not a firm is constrained by fixed or

variable costs in achieving higheroutput.

Theory of Marginal Costing

The theory of marginal costing as set out in A report on Marginal Costing published by CIMA,London is as follows:

In relation to a given volume of output, additional output can normally be obtained at less than

proportionate cost because within limits, the aggregate of certain items of cost will tend to

remain fixed and only the aggregate of the remainder will tend to rise proportionately with an

increase in output. Conversely, a decrease in the volume of output will normally be accompanied

by less than proportionate fall in the aggregate cost.

The theory of marginal costing may, therefore, by understood in the following two steps:

1. If the volume of output increases, the cost per unit in normal circumstances reduces.Conversely, if an output reduces, the cost per unit increases. If a factory produces 1000

units at a total cost of $3,000 and if by increasing the output by one unit the cost goes up

to $3,002, the marginal cost of additional output will be $.2.

2. If an increase in output is more than one, the total increase in cost divided by the totalincrease in output will give the average marginal cost per unit. If, for example, the output

is increased to 1020 units from 1000 units and the total cost to produce these units is

$1,045, the average marginal cost per unit is $2.25. It can be described as follows:
http://www.businessdictionary.com/definition/estimating.htmlhttp://www.businessdictionary.com/definition/selling-price.htmlhttp://www.businessdictionary.com/definition/range.htmlhttp://www.businessdictionary.com/definition/product.htmlhttp://www.businessdictionary.com/definition/unit.htmlhttp://www.businessdictionary.com/definition/pay.htmlhttp://www.businessdictionary.com/definition/contribute.htmlhttp://www.businessdictionary.com/definition/net-income.htmlhttp://www.businessdictionary.com/definition/variable-cost.htmlhttp://www.businessdictionary.com/definition/output.htmlhttp://www.businessdictionary.com/definition/output.htmlhttp://www.businessdictionary.com/definition/variable-cost.htmlhttp://www.businessdictionary.com/definition/net-income.htmlhttp://www.businessdictionary.com/definition/contribute.htmlhttp://www.businessdictionary.com/definition/pay.htmlhttp://www.businessdictionary.com/definition/unit.htmlhttp://www.businessdictionary.com/definition/product.htmlhttp://www.businessdictionary.com/definition/range.htmlhttp://www.businessdictionary.com/definition/selling-price.htmlhttp://www.businessdictionary.com/definition/estimating.html


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Additional cost =

Additional units

$ 45 = $2.25

20

The ascertainment of marginal cost is based on the classification and segregation of cost into

fixed and variable cost. In order to understand the marginal costing technique, it is essential to

understand the meaning of marginal cost.

Marginal cost means the cost of the marginal or last unit produced. It is also defined as the cost

of one more or one less unit produced besides existing level of production. In this connection, a

unit may mean a single commodity, a dozen, a gross or any other measure of goods.

For example, if a manufacturing firm produces X unit at a cost of $ 300 and X+1 units at a cost

of $ 320, the cost of an additional unit will be $ 20 which is marginal cost. Similarly if the

production of X-1 units comes down to $ 280, the cost of marginal unit will be $ 20 (300280).

The marginal cost varies directly with the volume of production and marginal cost per unit

remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all

variable overheads. It does not contain any element of fixed cost which is kept separate under

marginal cost technique.

Marginal costing may be defined as the technique of presenting cost data wherein variable costs

and fixed costs are shown separately for managerial decision-making. It should be clearly

understood that marginal costing is not a method of costing like process costing or job costing.

Rather it is simply a method or technique of the analysis of cost information for the guidance of

management which tries to find out an effect on profit due to changes in the volume of output.

There are different phrases being used for this technique of costing. In UK, marginal costing is a

popular phrase whereas in US, it is known as direct costing and is used in place of marginal

costing. Variable costing is another name of marginal costing.

Marginal costing technique has given birth to a very useful concept of contribution where

contribution is given by: Sales revenue less variable cost (marginal cost)


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Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution

goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F +

P).

In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed cost

(C = F). this is known as break even point.

The concept of contribution is very useful in marginal costing. It has a fixed relation with sales.

The proportion of contribution to sales is known as P/V ratio which remains the same under

given conditions of production and sales.

The principles of marginal costing

The principles of marginal costing are as follows.

a. For any given period of time, fixed costs will be the same, for any volume of sales andproduction (provided that the level of activity is within the relevant range).

Therefore, by selling an extra item of product or service the following will happen.

Revenue will increase by the sales value of the item sold.

Costs will increase by the variable cost per unit. Profit will increase by the amount of contribution earned from the extra item.

b. Similarly, if the volume of sales falls by one item, the profit will fall by the amount ofcontribution earned from the item.

c. Profit measurement should therefore be based on an analysis of total contribution. Sincefixed costs relate to a period of time, and do not change with increases or decreases in

sales volume, it is misleading to charge units of sale with a share of fixed costs.

d. When a unit of product is made, the extra costs incurred in its manufacture are thevariable production costs. Fixed costs are unaffected, and no extra fixed costs are

incurred when output is increased.


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Features of Marginal Costing

The main features of marginal costing are as follows:

1. Cost ClassificationThe marginal costing technique makes a sharp distinction between variable costs and

fixed costs. It is the variable cost on the basis of which production and sales policies are

designed by a firm following the marginal costing technique.

2. Stock/Inventory ValuationUnder marginal costing, inventory/stock for profit measurement is valued at marginal

cost. It is in sharp contrast to the total unit cost under absorption costing method.

3. Marginal ContributionMarginal costing technique makes use of marginal contribution for marking various

decisions. Marginal contribution is the difference between sales and marginal cost. It

forms the basis for judging the profitability of different products or departments.

Advantages and Disadvantages of Marginal Costing Technique

Advantages

1. Marginal costing is simple to understand.2. By not charging fixed overhead to cost of production, the effect of varying charges per

unit is avoided.

3. It prevents the illogical carry forward in stock valuation of some proportion of currentyears fixed overhead.

4. The effects of alternative sales or production policies can be more readily available andassessed, and decisions taken would yield the maximum return to business.

5. It eliminates large balances left in overhead control accounts which indicate the difficultyof ascertaining an accurate overhead recovery rate.

6. Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixedoverhead, efforts can be concentrated on maintaining a uniform and consistent marginal

cost. It is useful to various levels of management.


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7. It helps in short-term profit planning by breakeven and profitability analysis, both interms of quantity and graphs. Comparative profitability and performance between two or

more products and divisions can easily be assessed and brought to the notice of

management for decision making.

Disadvantages

1. The separation of costs into fixed and variable is difficult and sometimes givesmisleading results.

2. Normal costing systems also apply overhead under normal operating volume and thisshows that no advantage is gained by marginal costing.

3. Under marginal costing, stocks and work in progress are understated. The exclusion offixed costs from inventories affect profit, and true and fair view of financial affairs of an

organization may not be clearly transparent.

4. Volume variance in standard costing also discloses the effect of fluctuating output onfixed overhead. Marginal cost data becomes unrealistic in case of highly fluctuating

levels of production, e.g., in case of seasonal factories.

5. Application of fixed overhead depends on estimates and not on the actuals and as suchthere may be under or over absorption of the same.

6. Control affected by means of budgetary control is also accepted by many. In order toknow the net profit, we should not be satisfied with contribution and hence, fixed

overhead is also a valuable item. A system which ignores fixed costs is less effective

since a major portion of fixed cost is not taken care of under marginal costing.

7. In practice, sales price, fixed cost and variable cost per unit may vary. Thus, theassumptions underlying the theory of marginal costing sometimes becomes unrealistic.

For long term profit planning, absorption costing is the only answer.

Presentation of Cost Data under Marginal Costing and Absorption Costing

Marginal costing is not a method of costing but a technique of presentation of sales and cost data

with a view to guide management in decision-making.


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The traditional technique popularly known as total cost or absorption costing technique does not

make any difference between variable and fixed cost in the calculation of profits. But marginal

cost statement very clearly indicates this difference in arriving at the net operational results of a

firm.

Following presentation of two Performa shows the difference between the presentation of

information according to absorption and marginal costing techniques:

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


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Reconciliation Statement for Marginal Costing and Absorption Costing Profit

$

Marginal Costing Profit xxx

ADD

(Closing stockopening Stock) x OAR

xxx

= Absorption Costing Profit xxx

Where OAR( overhead absorption rate) =Budgeted fixed production overhead

Budgeted levels of activities

Marginal Costing versus Absorption Costing

After knowing the two techniques of marginal costing and absorption costing, we have seen that

the net profits are not the same because of the following reasons:

1. Over and Under Absorbed Overheads

In absorption costing, fixed overheads can never be absorbed exactly because of difficulty in

forecasting costs and volume of output. If these balances of under or over absorbed/recovery are

not written off to costing profit and loss account, the actual amount incurred is not shown in it. In

marginal costing, however, the actual fixed overhead incurred is wholly charged against

contribution and hence, there will be some difference in net profits.

2. Difference in Stock Valuation

In marginal costing, work in progress and finished stocks are valued at marginal cost, but in

absorption costing, they are valued at total production cost. Hence, profit will differ as different

amounts of fixed overheads are considered in two accounts.

The profit difference due to difference in stock valuation is summarized as follows:

a. When there is no opening and closing stocks, there will be no difference in profit.


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b. When opening and closing stocks are same, there will be no difference in profit, providedthe fixed cost element in opening and closing stocks are of the same amount.

c. When closing stock is more than opening stock, the profit under absorption costing willbe higher as comparatively a greater portion of fixed cost is included in closing stock and

carried over to next period.

d. When closing stock is less than opening stock, the profit under absorption costing will beless as comparatively a higher amount of fixed cost contained in opening stock is debited

during the current period.

The features which distinguish marginal costing from absorption costing are as

follows.

a. In absorption costing, items of stock are costed to include a fair share of fixed productionoverhead, whereas in marginal costing, stocks are valued at variable production cost only.

The value of closing stock will be higher in absorption costing than in marginal costing.

b. As a consequence of carrying forward an element of fixed production overheads inclosing stock values, the cost of sales used to determine profit in absorption costing will:

i. include some fixed production overhead costs incurred in a previous period butcarried forward into opening stock values of the current period;

ii. exclude some fixed production overhead costs incurred in the current period byincluding them in closing stock values.

In contrast marginal costing charges the actual fixed costs of a period in full into the

profit and loss account of the period. (Marginal costing is therefore sometimes known as

period costing.)

c. In absorption costing, actualfully absorbed unit costs are reduced by producing in greaterquantities, whereas in marginal costing, unit variable costs are unaffected by the volume

of production (that is, provided that variable costs per unit remain unaltered at the

changed level of production activity). Profit per unit in any period can be affected by the

actual volume of production in absorption costing; this is not the case in marginal

costing.


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d. In marginal costing, the identification of variable costs and of contribution enablesmanagement to use cost information more easily for decision-making purposes (such as

in budget decision making). It is easy to decide by how much contribution (and therefore

profit) will be affected by changes in sales volume. (Profit would be unaffected by

changes in production volume).

In absorption costing, however, the effect on profit in a period of changes in both:

i. production volume; andii. sales volume;

is not easily seen, because behaviour is not analysed and incremental costs are not

used in the calculation of actual profit.

Limitations of Absorption Costing

The following are the criticisms against absorption costing:

1. You might have observed that in absorption costing, a portion of fixed cost is carried overto the subsequent accounting period as part of closing stock. This is an unsound practice

because costs pertaining to a period should not be allowed to be vitiated by the inclusion

of costs pertaining to the previous period and vice versa.

2. Further, absorption costing is dependent on the levels of output which may vary fromperiod to period, and consequently cost per unit changes due to the existence of fixed

overhead. Unless fixed overhead rate is based on normal capacity, such changed costs are

not helpful for the purposes of comparison and control.


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1.2Objectives of the study

1.To study the performance of fixed and variable cost with reference to Sri Velavan Fireworks

2.To analyze the contribution of Sri Velavan Fireworks

3.To Analyze the cost volume profit analysis , margin of safety and Breakeven point of Sri

Velavan fire works

4.To assist the organization in fixing the sales target and determining the desired profit through

contribution analysis to Sri Velavan fireworks


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1.5Limitation of the study:

1. The tools used for analyzing marginal costing are limited in number.

2.The researcher can set their own values for calculating desired profit and expected sales.


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5.Title: Marginal costing

Author:E Haris

Abstract:

Marginal costing provides vital information for marking business decisions in both the

private and public sectors of the economy in order to make these decisions, manager must be

fully be aware of the underlying concepts and of their limitations. The first of the book Describes

cost behavior and relationship and its relationship to business decisions. Marginal costing profit

statements are compared with those prepared under absorption costing principles, The second

part of the book examines the role of marginal costing in various types of business

6.Title: Marginal costing

Author: F,C,Lawrence.

Abstract:

In economic and finance, marginal cost is the change in total cxost that arises when the

quantity produced changes by one unit. That is, it is the cost of producing one more unit of

agood. Mathamatically, the marginal cost (TC) function with repect to quantity.Note That the

marginal cost will changes with volume, As a non-linear and non-proportioal cost function

includes

1.Variable terms dependent to volume,

2.Constant terms independent to volume and occurring with the respective lot size,

3.Jump fix cost increase or decrease dependent to steps of volume increase


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1.7Research methodology

Research methodology

Research methodology generally refers to the systematic procedure carried out in any

project or research study.

Research:

Research is the systematic investigation into existing or new knowledge. It is used to

establish or confirm facts, reaffirm the results of previous work, solve new or existing problems,

support theorems, or develop new theories.

Research Design:

The research had chosen the analytical research for conducting this research. Analytical

design is based on borrowing hypothesis.

Types of research design:

Analytical Research Descriptive Research Experimental Research

Analytical Research:

Analytical Research means the researcher has to use fact or information already

available, and analyze these to make a critical evolution of material.

Sources of data:

The study was conducted by using secondary data sources; and it was collected through

company annual reports and the related websites. It also provided sufficient information relating

to the management and day to day affairs of the company.


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Types of data:

Primary data Secondary data

Primary Sources

Primary sources are original sources from which the researcher directly collects data that

have not been previously collected.

Secondary data:

Secondary data refers to the statistical material which is not originated by the investigator

himself but obtained from someone elses records, or when primary data is utilized for any other

purpose at some subsequent enquiry it is termed as secondary data. This type of data is generally

taken from newspapers, magazines, bulletins, Reports, journals etc.

Data collection:

Profit and loss accountant balance sheet where collected from Sri velavan Fire works,

sivakasi for the financial year from 2006-2007 to 2010-2011

Period of study

The period of the study was conducted from financial year 2006-2007 to 2010-2011

Tools used for data analysis:

Profit volume ratio Contribution Break even analysis Margin of safety Cost volume profit ratio


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1. Profit volume ratio:(p/v ratio)

The sales and marginal costs vary directly with the number of units sold or produced. So,

the difference between sales and marginal cost, i.e. contribution, will bear a relation to sales and

the ratio of contribution to sales remains constant at all levels. This is profit volume or P/v ratio.

Thus,

Profit volume ratio= (Contribution/sales) *100

2. Contribution:

Contribution margin is the marginal profit per unit sale. It is a useful quantity in carrying

out various calculations, and can be used as a measure of operating leverage.

Contribution = salesVariable cost

3. Break even analysis:

In economics & business, specifically cost accounting, the breakeven point (BEP) is the

point at which cost or gain, and one has broken even. A profit or a loss has not been made,

although opportunity costs have been paid, and capital has received the risk- adjusted, expected

return.

If they think they cannot sell that many, to ensure viability they could:

Try to reduce the fixed costs(by renegotiating rent for example, or keeping better controlof telephone bills or other costs)

Try to reduce variable costs( the price it pays for the tables by finding anew supplier) Increase the selling price of their tables.

Break even analysis = Fixed cost/ Total contribution* Total sales


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4. Margin of safety:

Margin of safety represents the strength of the business. It enables a business to know

what the exact amount it has gained or lost is and whether they are over or below the breakeven

point.

Marginal of safety =(current output-breakeven output)

Margin of safety% = (current output- breakeven output)/current output x100

Margin of safety = (Net profit)/(p/v Ratio)

5. Cost volume profit ratio:

The cost-volume-profit analysis is the systematic examination of the relationship between

selling prices, production volumes, cost, expenses and profits. This analysis provides very useful

information for decision-marking in the management of a company. For example, the analysis

can be used in establishing sales prices, in the product, in the product mix selection to sell, in the

analysis of the impact on profits by changes in costs.


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CHAPTERII

2.1Industry profile

Fireworks, or rather gunpowder, are most likely to have originated in China some 2,000

years ago. Some say that fireworks were discovered by accident by a Chinese cook who

happened to mix charcoal, sulphur and saltpeter.

The Chinese named this black powder "huo yao" ("Fire Chemical") and developed it further.

When the mixture was inserted into the hollow of a bamboo stick and thrown into a fire, the

gases produced a bang. The basic fire cracker was born.

From that point forward, fire crackers played an essential part in Chinese festivities -weddings,

religious rituals -any cause for celebration heard their bang due to the belief that they were

thought to be powerful enough to scare off evil spirits. Chinese New Year is a particularly

popular event that is celebrated with firecrackers to usher in the new year free of the evil spirits.

To this day, the simple firecracker is still the most common type of firework in China.

Some sources suggest that fireworks may have originated in India, but there is sufficient

published evidence to strongly suggest otherwise.

Visit the Chinese city of Liu Yang in Hunan Province, and you will see a museum and temple

built in the Song Dynasty dedicated to a Chinese monk named Li Tian. He is credited with the

invention of firecrackers about 1,000 years ago. The Chinese people celebrate the invention of

the firecracker every April 18 by offering sacrifices to Li Tian.

Liu Yang City and the surrounding area of Hunan Province remains the main fireworks

producing region in the world. Recent trends towards capitalism in China have created a

"explosion" of growth in the fireworks industry in Liuyang. The region is proud of its fireworks

heritage and links the growth to the critical mass of having a workforce skilled in fireworks

production, a humid climate and a hilly topography that all promote the efficiency and safety of

the production of fireworks.


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Often detractors of the fireworks industry say that fireworks are produced in China to take

advantage of cheap labor. But the reality is that the fireworks industry existed in China long

before the advent of the modern era and long before the disparity in east-west wage rates, and

hopefully the fireworks industry will exist long after the Chinese economy grows to the point the

wages are the same or higher then the west.

The knowledge of fireworks began to spread to the west. It is believed that Marco Polo on one of

his trips to China transported this invention to the Middle East where European Crusaders

brought it to England.

The English Scholar Roger Bacon (1214-1294) was one of the first Europeans to study

gunpowder and write about it.

Black powder was first used for military purposes. But these same experts began to put on

elaborate displays to celebrate military victory and important state events.

The English were also fascinated with fireworks. Fireworks became very popular in Great

Britain during the reign of Queen Elizabeth I. William Shakespeare mentions fireworks in his

works, and fireworks were so much enjoyed by the Queen herself that she created the position of

"Fire Master of England." King James II was so pleased with the fireworks display that

celebrated his coronation that he knighted his Fire Master.

For the most part, these early fireworks displays consisted of mostly simple aerial effects. There

real impact was in the use of elaborate ground displays. Giant "machines" that consisted of

rotating and moving parts "driven" by many small rocket motors with sparking tails. Elaborate

"fire pictures" or "set pieces" made paintings of fire with thousands of individual "lance" much

like a modern TV set uses pixels to create a image. Each "lance" providing an individual pixel of

light.

However it was the Italians and Japanese that are credited for developing the aerial shells that are

most popular in today's fireworks displays.


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The Italian tradition developed a unique method of shell construction that allows the production

of extremely large and heavy "shells" that are cylindrical in shape and can have many sequential

breaks. These some examples of these shells are the "Hammer Shell" which has a sound similar

to a blacksmith's hammer coming down on a anvil or a "Timed Salute" were the shell breaks

with many smaller reports, each exploding in perfect sequential timing.

The shells of the Japanese Tradition are the one most often seen in modern fireworks displays.

These shells are characterized by spherical construction and their effect is to create a perfect fire

"flower" in the sky. Hence, in Japan, they are described as "Hanabi" and given such names as

Chrysanthemum and Peony.

Modern day Chinese manufactures have perfected shells of the Japanese tradition and can mass

produce excellent performing shells at a reasonable cost. Traditional Italian style shells are not

practical for mass production and thus have not found much use in commercial fireworks.

The tradition of Italian style fireworks lives on in the small country of Malta and also in USA

enthusiast organizations such as the PGI "Pyrotechnics Guild International".

The modern era of Chinese manufacturers began in the early 1970s. Prior to that time, business

was being done between the outside and Chinese companies through Hong Kong brokers with

little or no direct contact with mainland manufacturers.

Throughout the 1970s and 1980s, the flow of Chinese fireworks consisted of state owned

factories producing fireworks that were then exported through government owned provincial

export corporations. Products produced in Hunan went through the Hunan Export Corporation,

and products produced in Jiangxi went through the Jiangxi Export Corporation, and so on.

During this period, factories were not required to make a profit, but rather their goal was to keep

people working. The Chinese government subsidized factories to keep production going.

The Provincial Export Corporation in turn sold to Hong Kong brokers who were the link

between Mainland China and the foreign business entities. Their one main skill was that they

spoke both "English" and "Chinese". For this they were able to earn a substantial wage. The


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Hong Kong brokers also procured orders, arranged logistics, and helped finance shipments to the

U.S. distributors.

During this time period that the first formally educated leader of China, Chairman Deng

Xiaoping, saw that Communism simply did not work economically. Chairman Deng began a

policy of economic reform that basically set China on the road toward capitalism.

In the 1990s, economic reform continued under Chairman Jiang Zemin as Chinese factories were

privatized. They were sold and forced to turn a profit for the first time. Often the once

government employee managers of the factories, scrounged and borrowed enough money to

purchase their employer from the government. Hence the private fireworks factory was born.

At the same time, the employees of the Provincial Export Corporations left the government

owned companies and were permitted to start their own trading companies. Providing not

manufacturing serves but trading services.

Hence, there are two main types of companies in Chinese Fireworks. Manufactures and Trading

Companies. All together there are more then 1,500 registered companies and many more that

operate with-out registration.

In order to survive, Hong Kong brokers invested money into massive marketing campaigns.

Producing private labels with elaborate colorful labels.

Chinese Trading companies have now followed this lead and are producing their own private

labels.

Dominator Fireworks carefully uses this knowledge of the History of Fireworks to produce a

product line that takes advantage of all the best the the world has to offer, including the

technology of the Japanese and Italians and the rapidly changing economics of the Chinese.

Fireworks in the West

The earliest recorded use of gunpowder in England, and probably the western world, is

by the Franciscan monk Roger Bacon. He was born in Ilminster in Somerset in 1214 and lived,


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as a master of languages, maths, optics and alchemy to 1294. He recorded his experiments with a

mixture which was very inadequate by todays standards but was recognisable as gunpowder. His

formula was very low in saltpetre because there was no natural source available, but it contained

the other two essential ingredients: charcoal and sulphur.

In 1242 he wrote: "...if you light it you will get thunder and lightening if you know the trick",

Fireworks as such probably arrived in the 14th century, brought back from the East by

Crusaders, and they rapidly became a form of international entertainment. The first recorded

fireworks in England were at the wedding of Henry VII in 1486. They became very popular

during the reign of Queen Elizabeth I. Shakespeare mentions them and they were so much

enjoyed by the Queen herself that she created a "Fire Master of England". James II was so

pleased with his coronation display that he knighted his firemaster. King Charles V as well had agreat liking for fireworks. He had many 'fireworkers' in his staff. He celebrated all his victories

with fireworks. Gradually the royal courts took up fireworks as a favourite form of celebrations

and festivities. Fire Masters soon became a much sought after commodity. Many of them were

killed or grievously injured as they entertained others with their dangerous profession.

So by the 14th-15th century almost every country had its own version of fireworks. While the

Germans used them in battles, the British lighted fireworks in celebrations and the Italians, who

were the first to manufacture fireworks in Europe, used them to mark great occasions. Though

the credit for invention of fireworks goes to China, Europe surpassed China in pyro-technic

development. During the Renaissance, two European schools of pyrotechnic thought emerged:

one in Italy and the other at Nuremberg, Germany. The Italian school of pyrotechnics

emphasized elaborate fireworks, and the German school stressed scientific advancement. Both

schools added significantly to further development of pyrotechnics, and by the mid-17th century

fireworks were used for entertainment on an unprecedented scale in Europe, being popular even

at resorts and public gardens. Regular fireworks pageants were held where elaborate displays of

fireworks were held.


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Fireworks in America

The earliest settlers brought their love of fireworks to the New World, where firings of

black powder were used to celebrate holidays and impress the natives. Pranksters in the colony

of Rhode Island caused enough problems that in 1731 a ban was established on the mischevious

use of fireworks.

By the time of the American Revolution, fireworks had long played a part in celebrating

important events. It was natural that not only John Adams, but also many of his countrymen,

should think of fireworks when Independence was declared. The very first celebration of

Independence Day was in 1777, six years before Americans knew whether the new nation would

even survive the war, and fireworks were a part of the revels.

American's spirit of celebration continued to grow and fireworks became more popular than ever.

In the late 18th Century, politicans used displays to attract crowds to their speeches.

Until the 19th century, fireworks lacked a major aestheticly essential characteristic: color.

Pyrotechnicians began to use a combination of potassium chlorate and various metallic salts to

make brilliant colors. The salts of these metals produce the different colors: strontium burns red;

copper makes blue; barium glows green; and sodium, yellow. Magnesium, aluminum, and

titanium were found to give off white sparkles or a flash.

History of fireworks in Sivakasi

Sivakasi is the natural choice for fireworks production. Low rain fall and a dry climate

prevailing in the Sivakasi area contribute to unabated production. What could have been

consumed in three hours of the Diwali Day came to be produced in 300 days, almost with

overtime jobs through out the year.

In Sivakasi the first fire works industry was started in the early 20th century. Having achieved a

measure of success in Safety Matches, Colour Matches and Star Matches, Mr. A Shanmuga

Nadar and Mr. Iya Nadar ventured upon the making of sparklers then the most popular item in

the Small Fireworks family, which were at the time imported from the UK and Germany.


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The germinal seed for the making of modern family Fireworks or Small Fireworks was planted

in the year 1934 when the Central Excise Duty on Matches was promulgated.

Until the outbreak ofWorld War II in 1939, there were only a handful of factories in Sivakasi,

Trichur and rimjalakuda in Kerala State. From 1938 to 1944 the import of fireworks and

firecrackers was obstructed by war. This shortage gave a fillip to the indigenous industry, which

was in its infancy.

During the year 1940, the Indian Explosives Rules were enacted whereby a system of licensing

was introduced for manufacture, possession and sale. Thus came to be set up in the year 1940 the

first organized factory with several precautions and safety measures.

The shortage in themarket helped these, then seasonal, factories to work even during off-season

and build up stocks. With World War II coming to an end and the gateway for import of raw

materials having been reopened, the indigenous industry enlarged itself.

Not only the existing factories broadened their efforts, there came into existence several new

units, of which National Fireworks, Kaliswari Fireworks and Standard Fireworks were

prominent in the year 1942. These three factories started marketing their products throughout the

length and breadth of India. These were later supplemented by new units at the average of 10 per

year. What started as I or 2 factories in 1923, rose to 3 in 1942, and by the year 1980 the number

of factories had risen to 189. By the end of 2001 the total number of factories was 450 in

Sivakasi alone.


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2.2Company profile

The foundation stone of our company was laid by Sri K. Nataraja Nadar, an enterprising

gentleman, in 1973, and the company has never looked back since then.

Our gradual growth is being promoted by the well wishers, dedicated partners, agents and staff.

Our Banker: Indian Overseas Bank.

Management

Mr.N.Chithirai Selvam - CEO

Mr.N.Elangovan (Administration)

Mr.N.Gandheeswaran (Product Design)

Mr.N.Kartheeswaran (Purchase)

Mr.N.Rathina Kumar (Marketing)

Group Concerns

^ Winner Fireworks Factory^ Sri Rathna Note Books

^ Sri Rathna Traders (Fireworks)

^ Sree Selvarathina Traders (Packaging materials)

Membership

We, Sri Velavan Fireworks is a Association member in Tamil Nadu Fireworks and Amerces

Manufacturers Association (TANFAMA) , Tamilnadu Chamber of Commerce, Fireworks Dealers

Association, Sivakasi Chemical Dealers Association, Lions Club of Sivakasi Industrial Town, Sivakasi

Jaycees Club & Young Entrepreneur School(YES).

Raw materials

We procure raw materials from certified vendors and ensure that all products manufactured here

are superior quality and some of our featured raw materials are potasium nitrate, sulphur, barium


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nitrate, charcoal powder, paper & board, labels, jute & yarns, cellophane, Kraft paper, foils and

aluminum powder.

Our Support

Our major strength is our infrastructure, which comprises of good working environment. Our

efficient team comprises of skilled professionals, experts and dedicated workforce, who work to

produce high quality fireworks products. The entire work force has been segregated into teams

for better performance and efficiency.

Team

We have received firm positioning in the market by our dedicated teamwork that is diligently

engaged in delivering the wide range of product line. Since the industry basically involves

manual work, we have an experienced work force comprising of skilled and semi skilled labours

for both . We ensure that the goods are competent to deliver maximum quality output.

Products

1.Flower Pots

2.Chakkars

3.Twinkling Stars

4. Pencils

5.Single Crackers

6.Multiple Deluxe Crackers

7.Multiple Crackers

7.Garlands


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8.Bombs

9.Rockets

10.Fancy Varieties


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CHAPTERIII

3.1 DATA ANALYSIS AND INTERPRETATION

VARIABLE COST

Variable cost is expenses the change in proportion to the activity of the bussiness , it can also be

considered normal cost

TABLE 3.1

THE TABLE SHOWING THE AMOUNT OF VARIABLE COST

particular 2006-07 2007-08 2008-09 2009-10 2010-11Raw material 1039566.65 1190421.00 1291174.00 977311 1152921

Factory wages 424251.65 409867.65 517659.25 506812.85 1801822.25

Lorry freight 13929.50 42735 75563 150113 88014

Sundry wages 28021.50 81319.60 158424 215729.75 -

Temporary wages 708431.85 659732.85 762211.30 989041.20 317806.75

Commission 16240 6145 81945 101589 146825

Electric charges 5672 7491 13054 11722 21447

Maintenance 34230.60 40164 71051.6 104886.75 134280.15

Telephone charges 22894 19280 19128 22319 28538

Advertisement - 1800 40200 57600 109244

Total 2293237 2458956.1 3030410.15 3137123.95 3800898.15

Sources: Secondary data

INFERENCE:

The above table show that, the amounts of variable costs are in the increasing trend because of

increase in raw material expense and labor charges. The higher variable cost recorded in the year

2010-2011 as 3800898.15 lower amount of variable cost has recorded in the year 2006-07 as

2293237.


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3.1THE CHART SHOWING THE AMOUNT OF VARIABLE COST

0

500000

1000000

1500000

2000000

2500000

3000000

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

2200271.65

2341341

2729468.55 2688895.45 2688895.45

variable cost


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3.2THE CHART SHOWING THE AMOUNT OF FIXED COST

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

897390.75

1045365

1116574.52 1093202.15

1525972.15

Fixed cost


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3.4TABLE SHOWING TREND ANALYSIS OF FIXED COST

particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Bank interest 100% 108.41% 97.60% 96.58% 106.04%

Insurance 100% 114.40% 94.18% 90.68% 136.54%

Partner salary 100% 100% 100% 100% 200%

Salary 100% 117.82% 162.82 91.91% 98.57%

Source: secondary data

INFERENCE:

The above tables clearly show that the amounts of variable costs were recorded in

fluctuating trend.


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CONTRIBUTION:

Contribution is the difference between the sales and the marginal cost. It is the aggregate

of fixed cost and profit. Contribution is also known as gross margin, marginal contribution,

Marginal income, Marginal revenue, Marginal balance and Profit pick-up

Contribution = salesvariable

3.6TABLE SHOWING CONTRIBUTION

YEAR SALES VARIABLE COST CONTRIBUTION

2006-07 4024585.25 2293237 1731348.252007-08 5232622.70 2458956.1 2773666.6

2008-09 8213147.10 3030410.15 5182736.95

2009-10 8262981.90 3137123.95 5125857.95

2010-11 10193125.00 3800898.15 6392226.85

INFERENCE:

The above table is show that contribution for the period of five year from 2006-07 to

2010-1011.It is clear that contribution is fluctuating trend due to increase variable cost. Higher

contribution record in the year 2010-11 as 6392226.85 and lower amount of contribution record

in the year 2006-07 as 1731348.25.


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BREAK EVEN ANALYSIS :

In economics & business , specifically cost accounting , the breakeven point (BEP)

is the point at which cost or expenses and revenue are equal ; there is no net loss or gain , and

one has broken even . A profit or a loss has not been made, although opportunity costs have

been paid, and capital has received the risk adjusted, expected return.

Break even analysis = Fixed cost/ Total contribution* Total sales

3.7TABLE SHOWING THE BREAK EVEN ANALYSIS

YEAR FIXED COST CONTRIBUTION SALES BREAK EVENANALYSIS

2006-07 773207 1731348.25 4024585.25 1797349.25

2007-08 842796 2773666.66 5232622.70 1589965.20

2008-09 860637.82 5182736.95 8213147.10 1363863.35

2009-10 823679 5125857.95 8262981.90 1327786.43

2010-11 928145 6392226.85 10193125.00 1480031.64

Sources: secondary data

INFERENCE:

The above table show that the break even analysis in fluctuating trend in the period of

years from 2006-2007 to 2010-2011.Higher break even analysis has recorded in 2006-07

as1797349.25 lower amount of break even analysis recorded in 2008-09 as1363863.35


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3.4CHART SHOWING THE BREAK EVEN ANALYSIS

0

500000

1000000

1500000

2000000

2500000

3000000

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

1979717.211891894.73

1672342.88 1620554.266

2917065.78

Break even analysis


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MARGIN OF SAFETY

Margin of safety represents the strength of the business. It enablesssss a business to know

what the exact amount it has gained or lost is whether they are over or below the break even

point

Margin of safety = (Net profit)/(p/v Ratio)

3.8TABLE SHOWING THE MARGIN OF SAFETY

YEAR NETPROFIT P/V RATIO MARGIN OF

SAFETY

2006-07 -179290.65 43.01 -4168.58

2007-08 6129.83 53.00 115.65

2008-09 226635.73 63.10 3591.69

2009-10 241933.53 62.03 3900.26

2010-11 178797.30 62.71 2851.17

Source; secondary data

INFERENCE:

It is obvious from above table show that the margin safety was in fluctuating trend in the

period of 2006-2007 to 2010-2011. Higher margin of safety has recorded in 2009-10 as 3586.85

lower margin of safety recorded in the year 2007-08 as -4168.58.


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Cost volume profit analysis:

Cost volume profit analysis is an important tool of profit planning, It provide information

about the following matters

The behavior of cost in relation to volume Volume of production or sales , where the business will break even Sensitivity of profits due to variation in output Amount of profit for a projected sales volume Quantity of production and sale for target profit level3.9TABLE SHOWING SALE AND PROFIT

Particulars 2009-2010 2010-2011

sales 8262981.90 10193125

profit 4302228.95 5464081.85

Change in profit

P/v ratio = *100

Change in sales

1161852.9

= *100

1930143.1

= 60.19

Contribution = Fixed cost + profit

5125857.95 = Fixed cost + 4302228.95

Fixed cost = 5125857.95- 4302228.95


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Fixed cost = 820629

Calculation of sale required to earn profit of 7000000

Fixed cost + desired profit

Sales required =

P/v Ratio

820629 + 7000000

Sales required =

60.19

= 129932.36

Calculation of sale required to earn profit of 8000000

Fixed cost + desired profit

Sales required =

P/v Ratio

820629 + 8000000

Sales required =

60.19

= 146546.41


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3.10TABLE SHOWING REQUIRED SALE TO EARN DESIRED PROFIT

S.NO Desired profit Sale required

1 7000000 129932.36

2 8000000 146546.41

3 9000000 163160.47

INFERENCE:

The above table is prepared to shows that estimated sales required earn profit . It is clear

that the company can earn a profit 7000000 at sales of 129932.36, earn a profit 8000000 at sales

of 146546.41, earn a profit 9000000 at sales of 163160.47.


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CHAPTER-IV

4.1 FINDINGS:

The highest amount of variable cost was recorded in the financial year 2010-11 as 3800898 .

The highest amount of fixed cost was recorded in the financial year 2010-11as 928145

The highest amount of profit record in 2010-11 as 5464081.85 The highest amount of contribution record in 2010-11 as 6392226.85 The highest break even analysis has recorded in the year 2006-07 as

1797349.25

The Highest margin of safety has recorded in 2009-10 as 3586.85 company can earn a profit 7000000 at sales of 129932.36, earn a profit

8000000 at sales of 146546.41, earn a profit 9000000 at sales of 163160.47.


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CHAPTER-V

4.1 SUGGESTION:

Management can concentrate more on regulating the variable costs and thecompany can maintain separate records for controlling the variable cost and they

can increase the operating cost.

The periodical monitoring and control of cost is very essential to improve theprofit volume ratio

Management can increases its marginal contribution by increasing its fixed coston sales.


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5.1CONCLUSION

The research study aims in the area of contribution analysis in Sri Velavan Fireworks for

the future profit planning the company may control its cost and reduce cost. The study facilities

the management to identify unprofitable operations and improve overall profitability.

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