Marginal Costing & Break Even Point (BEP)

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Utility of Marginal Costing and BEP

Marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution. Marginal costing is also the principal costing technique used in decision making. The key reason for this is that the marginal costing approach allows management's attention to be focused on the changes which result from the decision under consideration. The concept of marginal costing is based on the behaviour 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. A break-even point is the minimal accepted point for most businesses. Here, the total costs for a product or service and the total revenue that product or service have brought in are equal. Therefore, there is no profit nor any loss. This type of revenue is needed to cover the total fixed and variable expenses of the company for a specified time period.

To calculate the BEP in units:

BEP in Units = Fixed Costs / (Sales Price per Unit - Variable Cost per Unit)

To calculate the BEP in Dollars:

BEP in Rupees = Sales Price per Unit x BEP in Units

There are 3 factors in the breakeven calculation:

• the sale price

• the level of variable costs

• the level of fixed costs

The breakeven point is reached when the margin on variable costs generated by the company equals the total amount of its fixed costs.

In this course, the students will learn:

• Concept of Marginal Cost and Break Even Point

• Marginal Cost Equation

• Cases and Problems in Marginal Costing

• Break Even Point (BEP) & Profit Volume Ratio (P/V Ratio)

• Income Statement in Break Even Analysis

• Indifference Point

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