OCR Business
Unit 8 Management
Accounting

1

What would be the cost of producing 17,ooo units
• Production units

Total cost
£

• 10,000
• 12,000
• 14,000
• 15,000
2

150,000
170,000
190,000
200,000

Marginal Costing

3

Lesson 4 Aims and objectives
• Describe how marginal cost is calculated
• Prepare a marginal costing statement
• Calculate the contribution
• Explain what marginal costing is useful for

4

HENRY’S TEAROOM

5

Marginal costing
Under this method only the variable costs of production are included in the cost per unit. The fixed overheads are treated as period costs and not part of the cost unit.
Marginal costing values output and stock by the variable costs required by each unit:

direct materials
direct labour
direct expenses
variable production overheads.
no fixed overheads or non-production overheads are absorbed into product costs = period costs
6

Marginal costing STATEMENT
•

Sales (12,500 x £100)

•

Cost of sales (Variable costs)
(at marginal cost, 12,500 × £40)

7

1,250,000

(500,000)

•

Contribution

•

Less: Fixed production costs

•

Fixed non-production costs

(150,000)

•

Profit for the period

200,000

750,000
(400,000)

Task
• Milliband Suites Limited manufactures a special type of chair. It is planning to sell 5,000 chairs for
£110 each.

• The costs are estimated as follows
• Direct materials £25 per chair
• Direct labour £40 per chair
£5 per chair
• Variable production overheads
• Fixed overheads£10 per chair
• Calculate the marginal cost and contribution
8

What is the contribution for one unit?
• Contribution per unit = selling price per unit less variable cost per unit

• How can this be used?

9

Marginal costing

10

Profit AND contribution

Profit measures the difference between the sales price of a unit and the variable and fixed costs of making and selling that unit.

11

Profit AND contribution
Contribution measures the difference between the sales price of a unit and the variable costs of making and selling that unit. Contribution is used in decision making as it is assumed that fixed costs will not change as activity changes.

There is therefore no direct link between profit and output - if output doubles, profits do not necessarily double. However there is a direct link between contribution and output – if output doubles or triples then contribution will double or triple.
12

Using Marginal costing
• Price setting
• Forecasting/cash flows
• Break even

13

ONLINE QUIZ
• http://www.osbornebooks.co.uk/quiz/show_

category.php?qid=A2%20Accounting%20for%2
0AQA

• CHAPTER 10 QUIZ

14

True or False
1. Capital expenditure relates to expenditure on assets that will benefit the organisation for more than one accounting period.

2. All direct costs behave as variable costs.
3. Semi-variable costs contain both a fixed element and a variable element.

4. Fixed costs may change from time to time due to factors other than output levels.

5. Variable costs per unit of output do not alter when volumes change.
15

Marginal Costing
• How is the marginal cost calculated
• What is the contribution
• What is it useful for?

16

Lesson 5 BREAK EVEN
POINT

17

“SPECIAL ORDER” PRICING
• Making a decision about a one-off order that may be below normal selling price,