Amity Business School

MANAGEMENT ACCOUNTING
The Chartered Institute of Management Accounting (CIMA)
of UK has defined Management Accounting as

Management Accounting is an integral part of

management concerned with identifying, presenting
and interpreting information used for
Formulating strategy,
Planning and controlling activities
Decision making
Optimising the use of resources
Disclosures to shareholders and other external to the
entity
Disclosure to employees

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TOOLS and TECHNIQUES USED IN

MANAGEMENT ACCOUNTING
Some of the tools used in Management Accounting are:
a) Ratio Analysis
b) Comparative Financial Statements
c) Funds Flow Statement
d) Cash Flow Statement
e) Standard costing and variance Analysis
f) Marginal costing and CVP Analysis
g) Budgeting
h) Responsibility Accounting
etc.

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MARGINAL COSTING
There are two techniques of product costing and income
determinationa) Absorption costing
b) Marginal Costing
Absorption costing is a total cost technique under
which total cost (fixed cost and variable cost) is charged
as production cost.
Under Marginal Costing , only variable costs are
charged as product costs and included in inventory
valuation.
Fixed manufacturing costs are not allotted to products
but are considered as period costs and thus charged
directly to Profit and loss Account.

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MARGINAL COSTING
The accounting system in which variable costs are
charged to cost units and fixed costs of the period are
written off in full against aggregate contribution. Its
special value is in decision making.
CIMA, London

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ASSUMPTIONS OF MARGINAL COSTING

All costs can be separated into fixed and variable cost
Variable cost per unit remains constant and total
variable cost varies in direct proportion to the volume of
production
Total fixed costs remain constant
Selling price does not change as volume changes
There is synchronization between production and sales.
This implies that volume of production and volume of
sales

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CVP ANALYSIS
CVP Analysis is an extension of the principles of Marginal
costing.
CVP analysis studies the relationship between cost volume
and profit.
- Cost of production
- Volume of production / sales
- Profit
CIMA, London has defined CVP Analysis as the study of
the effects on future profits of changes in fixed costs,

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Contribution
Contribution is the difference between sales and the
variable cost.
Contribution = Sales Variable Cost
Contribution = Fixed cost + Profit
For example: Sales =Rs 12000
Variable cost = Rs 7000
Fixed Cost = Rs 4000
Calculate profit

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Statement of Income
Particulars

Amount

Sales

***

Less:-Variable cost

***

Contribution
Less:- Fixed cost
Profit

***
***
***

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PROFIT- VOLUME RATIO (P/V RATIO)

Profit Volume Ratio
expresses the relationship of
contribution to sales. Also known as Contribution to
sales ratio
Symbolically P/V Ratio = Contribution
Variable Cost *100
Sales

* 100= Sales
Sales

P/V Ratio = Change in Contribution

Change in Sales
= Change in Profits
Change in Sales

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BREAK EVEN ANALYSIS

Break-even analysis is a widely used technique to study
the CVP relationship
Break Even point is that level of production and sales
where there is no profit and no loss. At this point total
cost is equal to total sales and the company makes no
profit and no loss .

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BREAK- EVEN POINT ALGEBRAIC

CALCULATION
Break Even point (in units) = Total Fixed Cost
Contribution per unit
Break Even point (in rupees) = Total fixed cost* sales per
unit
Contribution per unit
Total fixed cost* Total sales
Total Contribution
=Total fixed cost
P/ V Ratio

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BREAK EVEN POINT GRAPHIC

PRESENTATION

12

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BREAK EVEN POINT GRAPHIC

PRESENTATION
Angle of incidence: The angle formed by the intersection
of sales line and total cost line at the break even point.
This angle shows the rate at which profits are being
earned once the break even point has been reached.
The wider the angle, the greater is the rate of earning
profits.

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Target Profit
At break even point, the profit is zero. In case the volume
of output or sales is required to be computed for a
target (desired profit), this amount needs to be added to
fixed costs in the numerator.
Target Volume (in units) =Total Fixed Cost+ desired profit
Contribution per unit
Target Volume(in Rupees)=Total fixed cost+desired profit*
sales per unit
Contribution per unit

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Illustration 1
ABC Co Ltd. Markets plastic buckets. An analysis of their
accounting reveals:
Variable Cost per bucket
Rs 20
Fixed Cost
Rs 50,000 for the year
Selling Price per bucket
Rs 70
a) Calculate Break-even point (in units)
b) Find the number of buckets to be sold to get a profit of
Rs 30,000

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Illustration 2
Profit = Rs 200
Sales = Rs 2000
Variable Cost = 75% of sales
a) Find Break even sales in rupees
b) What would be the sales volume to earn a profit of Rs
500

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Illustration 3
From the following particulars calculate
a) Contribution per unit
b) P/V ratio
c) Break even point in units
d) What will be the Selling price per unit if the break even
point is brought down to 10,000 units?
Selling price per unit Rs 20
variable cost per unit Rs 16
Fixed expenses
Rs 60,000

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MARGIN OF SAFETY (M/S)

Margin of Safety may be defined as the difference between
actual sales and sales at break even point.
M/S = Actual sales Break even sales

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MARGIN OF SAFETY (M/S) Illustration

4
Company X
Actual Sales = Rs 1,20,000
Break even point = Rs 40,000
Company Y
Actual Sales = Rs 60,000
Break even point = Rs 40,000
Calculate M/S and also M/S as a percentage of sales

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MARGIN OF SAFETY (M/S) Illustration

5
The P/V ratio of Escorts Ltd. Is 50% and the margin of
safety is 40%. You are required to work out the net
profit and the breakeven point if sales volume is Rs
10,00,000.

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LIMITING OR KEY FACTOR

A limiting or key factor is a factor in the activities of an
undertaking which at a particular time or over a period
of time will limit the volume of output. For example:
i) Sales
ii) Materials
iii) Labour
iv)Production capacity
v) Financial Resources
The purpose of the limiting factor technique is to
identify the most profitable course of action in all such
cases

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Contribution per unit of key factor

When a key factor is operating, the most profitable
position is reached when contribution per unit of key
factor is maximum.
For example: If a choice lies between producing product
A which yields a contribution of rs 15 per unit and
product B which yields rs 20 per unit, product B would
be more profitable.
if, however, product A takes 3 kg of material (which is a
limiting factor) and product B takes 5 kg, the respective
contribution per kg of material would be:
Product A
Product B

= Rs 15/3
= Rs 20/5

=Rs 5
=Rs 4

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Illustration 6
You are given the following data
Sales
Year 2004
Year 2005

1,20,000
1,40,000

Profit
8,000
13,000

Calculate
a) P/V ratio
b) B.E.P
c) Profit when sales are Rs 1,80,000
d) Sales required to earn a profit of Rs 12,000
e) Margin of safety in year 2005.

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Illustration 7
A, B and C are three similar plants under the same
management who want them to be merged for better
operation. The details are as under:
Plant
A
B
C
Capacity operated
100%
70%
50%
(in lakhs)
(in lakhs)
in lakhs)
Turnover
300
280
150
Variable cost
200
210
75
Fixed Cost
70
50
62
Find out:
i) The capacity of the merged plant for break even
ii) The profit at 75% capacity of the merged plant
iii) The turnover from the merged plant to give a profit of
Rs 28 lakhs