CHAPTER -1

INTRODUCTION
Of
Marginal Costing

MARGINAL 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 costsOnly marginal (variable) costs are charged to products-.

Fixed cost as period costsFixed 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 inventoryThe word in progress and finished stocks are valued at marginal cost only.

ContributionContribution 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.

PricingIn 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
output

Fixed Cost:
Fixed cost means total of all fixed overheads. But it is important to note that in India, where
1. 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 profitvolume 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 Analysis
The 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 follows

C

S-V

Where, C

Contribution

Sales

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:
Particulars

Product A

Product B

Selling Price per unit

Rs. 100

Rs. 120

Less: Variable cost

50

80

Contribution Per Unit

50

40

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 = Contribution

If 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 Ratio

This 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

Where, C = Contribution (being the difference between sales and variable costs)
S = Sales
V = Variable Costs

PV 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 Even

By formula Margin of safety could be stated as:

1.

M/s. - (sales. units- break even units).

M/S. = Profit
P V Ratio

2.

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 Analysis

Break-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 Cost

Contribution per unit

In terms of Sales Value =

Fixed Cost

P V Ratio

Assumption 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 production
b) Selling prices
c) Volume of sales

These 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 Chart
The 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 2
RESEARCH
METHODOLOGY

Meaning:
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 Data

Primary 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 method

CHAPTER 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 Malak

This 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)
PARTICULARS

TOTAL/RS. PER KM/RS.

Hire Charges (Sales) @Rs.30 per

1440000

30.000

l. Cost of diesel

529800

11.038

2.cost of oil

18417

0.384

3. Repairs & maintenance (40%)

24000

0.500

4. Tyre cost

132000

2.750

5. Business promotion cost (30%)

2700

0.056

6. Other office cost (20%)

720

0.015

7.Depreciation

124000

2.583

TOTAL VARIABLE COST

831637

17.326

km.

VARIABLE COST

0.000
CONTRIBUTION

608363

12.674

MARGINAL PROFITABILITY STATEMENT FOR EXISTING BUSINESS

(20 BUSES, 960000 KMS. PER ANNUM)

PARTICULARS

Total/RS.

PER KM/RS.

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

28800000

30.000

l.Cost of diesel

10596000

11.038

2.cost of oil

368640

0.384

3. Repairs & maintenance (40%)

480000

0.500

4 Tyre cost

2640000

2.750

5.Business promotion cost(30%)

54000

0.056

6.0ther office cost(20%)

14400

0.015

7.Depreciation

2480000

2.583

TOTAL VARIABLE COST

16633040

17.326

CONTRIBUTION

12166960

12.674

VARIABLE COST

LESS: FIXED COST

l.RTO taxes

640000

2.Drivers Salary

1920000

3. Repairs & maintenance

720000

4. Insurance

640000

5. Admin. Expenses

1200000

6. Business Promotion Exps.

126000

7. Other office cost

57600

5303600

ANALYSIS OF EXISTING BUSINESS OF THE COMPANY

PARTICULARS

REMARKS

1. P. V. RATIO
CONTRIBUTION
---------------x

100

SALES

12166960
-------------- x

100

42.25

28800000

2. BREAK EVEN POINT

a) IN RUPEES
FIXED COST
----------------x
P. V. RATIO

5303600
---------------x

RS.12552900

42.25%

b) IN KILOMITERS
FIXED COST
---------------x
CONTRIBUTION PER .KM.
5303600
---------------------------12.674
3. MARGIN OF SAFETY

418463 KMS

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 .
4. PROFIT PERCENTAGE
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)

PARTICULARS

TOTAL/RS. PER KM/RS.

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

5760000

20.000

l. Cost of diesel

3178944

11.038

2.Cost of oil

110592

0.384

3. Repairs & maintenance (40%)

144000

0.5

4.Tyre cost

792000

2.75

5.Business Promotion cost(30%)

16128

0.056

6.0ther office cost(20%)

4320

0.015

7.Depreciation

743904

2.583

TOTAL VARIABLE COST

4989888

17.326

CONTRIBUTION

770112

16.044

VARIABLE COST

INFERENCE FOR 10 BUSES

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. 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
COMBINED MARGINAL PROFITABILITY STATEMENT FOR EXISTING & NEW
BUSINESS (20 BUSES, 960000 KMS. PER ANNUM) (10 BUSES, 288000 KMS. PER
ANNUM ADDINAL BUSINES
PARTICULARS

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

EXISTING/RS. ADDITION/RS TOTAL/RS

28800000

5760000

34560000

l. Cost of diesel

10596000

3178944

13774944

2.Cost of oil

368640

110592

479232

3. Repairs & maintenance (40%)

480000

144000

624000

4.Tyre cost

2640000

792000

3432000

5.Business promotion cost(30%)

54000

16128

70128

6.0ther office cost(20%)

14400

4320

18720

7.Depreciation

2480000

743904

3223904

16633040

4989888

21622928

12166960

770112

12937072

VARIABLE COST

TOTAL VARIABLE COST

CONTRIBUTION

LESS : FIXED COST

l. RTO taxes

640000

2.Drivers Salary

1920000

3. Repairs & Maintenance

720000

4. Insurance

640000

5. Admin. Expenses

1200000

6. Business Promotion Exps.

126000

7. Other Office Cost

57000

TOTAL FIXED COST

5303600

PROFIT

7633472

ANALYSIS OF TOTAL EXISTING & NEW BUSINESS OF THE COMPANY

PARTICULARS
REMARKS
1. P. V. RATIO
CONTRIBUTION
---------------x

100

SALES

12937072
--------- x

100

37.43

34560000
2. BREAK EVEN POINT
a) IN RUPEES
FIXED COST
-----------------P. V. RATIO

5303600
-------------37.43%

b) IN KILOMITERS
FIXED COST
------------------------CONTRIBUTION PER
KM

RS.14169382

5303600
--------------------------

511634 KMS

10.366
3. MARGIN OF SAFETY
a) IN RU PEES
ACTUAL SALES
34560000

B.E.P. SALES

14169382 RS 20390618

b) IN KIL0M1TERS
ACTUAL SALES KMS

1248000

B.E.P
KM
511634

736366 KMS.

4. PROFIT PERCENTAGE
PROFIT
---------------

X100

SALES

7633472
-----------------34560000

X100

22.09%

COMPARATIVE ANALYSIS OF DATA

PARTICULARS

EXISTING

REVISED

Increase

1. P. V. RATIO

42.25%

37.43

a) IN RUPEES

RS.12552900

RS.14169382

Rs.1616482

b) IN KILOMITERS

418463 KMS.

511634 KMS

93171 kms

a) IN RUPEES

RS.16247100

RS.20390618

Rs.4143518

b) IN KILOMITERS

541537 KMS

736366KMS.

194829 KMS

23.83%

22.09%

1.74%

4.82

2. BREAK EVEN POINT

3. MARGIN OF SAFETY

4.PRPOFIT PERCENTAGE

Decrease

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.
4. PROFIT PERCENTAGE
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 & CONCLUSION

SUGGESTION
It 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.

CONCLUSION
At 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.PATKAR
3) Cost accounting . JAMSHID.ESKANDARI
4) Cost accounting . REZA DARGAHI