Vendmart Food Services Company operates and services stack vending machines located in

restaurants, gas stations and factories in four southwestern states. The machines are rented from
the manufacturer. In addition, Vendmart must rent the space occupied by its machines. The
following expense and revenue relationships pertain to a contemplated expansion program of 80
machines. Fixed monthly expenses follow:

These questions relate to the given data unless otherwise noted. Consider each question
independently:

(1) What is the monthly breakeven point in number of units (snacks)? In dollar sales?
(2) If 45000 units were sold, what would be the Companys net income?
(3) If the space rental cost was doubled, what would be the monthly breakeven point in number
of units? In dollar sales?
(4) Refer to the original data. If, in addition to the fixed space rent, Vendmart Food Services
Company paid the vending machine manufacturer $0.07 per unit sold, what would be the
monthly breakeven point in number of units? In dollar sales?
(5) Refer to the original data. If, in addition to the fixed rent, Vendmart paid the machine
manufacturer $0.11 for each unit sold in excess of the breakeven point, what would be the
new net income be if 45000 units were sold?

PFB (kelag nodi)

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. The contribution concept lies at the heart
of marginal costing. Marginal costing values inventory at the total variable production cost of a unit of product.

The contribution concept lies at the heart of marginal costing. There is no under or over absorption of
overheads (and hence no adjustment is required in the income statement). Fixed costs are a period cost
and are charged in full to the period under consideration. Marginal costing is useful in the decision-
making process. It is simple to operate
The main disadvantages of marginal costing are that closing inventory is not valued in accordance
with accounting standards and that fixed production overheads are not 'shared' out between units of
production, but written off in full instead.

Absorption costing is a method of building up a full product cost which adds direct costs and a proportion of
production overhead costs by means of one or a number of overhead absorption rates. Absorption
costing values inventory at the full production cost of a unit of product.

Inventory values will therefore be different at the beginning and end of a period under marginal
and absorption costing.
If inventory values are different, then this will have an effect on profits reported in the income statement
in a period. Profits determined using marginal costingprinciples will therefore be different to those
using absorption costing principles.
Absorption costing includes an element of fixed overheads in inventory values (in
accordance with SSAP 9).
Analysing under/over absorption of overheads is a useful exercise in controlling
costs of an organisation
In small organisations, absorbing overheads into the costs of products is the best
way of estimating job costs and profits on jobs
The main disadvantages of absorption costing are that it is more complex to operate than marginal
costing and it does not provide any useful information for decision making

Reconciling profits reported under the different methods

When inventory levels increase or decrease during a period then profits differ under absorption and marginal
costing.

If inventory levels increase, absorption costing gives the higher profit.

This is because fixed overheads held in closing inventory are carried forward (thereby reducing cost of sales) to
the next accounting period instead of being written off in the current accounting period (as a period cost, as
in marginal costing).

If inventory levels decrease, marginal costing gives the higher profit.

This is because fixed overhead brought forward in opening inventory is released, thereby increasing cost of sales
and reducing profits.

If inventory levels are constant, both methods give the same profit.
Assumptions of CVP

Fixed cost remain static & marginal costs are completely variable at all levels of output.
Selling prices are constant at all sales volume.
Factor prices are constant at all sales volume .
Efficiency and productivity remain unchanged. In a multi product situation ,there is constant sales mix at
all level of sales.
Turnover level is only relevant factor affecting cost & revenue.
Value of production is equal to volume of sales.

APPLICATION OF MARGINAL COST & COST, VOLUME & PROFIT ANALYSIS-

COST CONTROL.
PROFIT PLANNING.
EVALUTION OF PERFORMANCE.
DECISION MAKING.
FIXATION OF SELLING PRICE.
KEY LIMITING FACTOR.
SUITABLE PRODUCT MIX.

Difference Between Absorption costing & Marginal costing

All costs fixed &variable are included for ascertaining the cost.
Different unit costs are obtained at different levels of output because of fixed expenses remaining same.
Difference between sales &total cost is profit.
A portion of fixed costs is carried forward to the next period because closing stock of work -in -progress
& finished goods is valued at cost of production which is inclusive of fixed cost. In this way costs of a
particular period are vitiated because fixed cost being period cost should be charged to the period
concerned & should not be carried over to next period .
The apportionment of fixed expenses on an arbitrary basis given rise to over or under absorption which
ultimately makes the product cost inaccurate and unreliable.
Absorption costing is not very helpful in taking managerial decision such as whether to accept the export
order or not ,whether to buy or manufacture ,the minimum price to be charged during depression etc.
Costs are classified according to functional basis such as production cost ,office and administrative cost
and selling and distribution cost.
Absorption costing fails to establish relationship of cost volume and profit as costs are seldom classified
into fixed &variable.

The apportionment of fixed expenses on an arbitrary basis given rise to over or under absorption which
ultimately makes the product cost inaccurate and unreliable.
Absorption costing is not very helpful in taking managerial decision such as whether to accept the export
order or not ,whether to buy or manufacture ,the minimum price to be charged during depression etc.
Costs are classified according to functional basis such as production cost ,office and administrative cost
and selling and distribution cost.
Absorption costing fails to establish relationship of cost volume and profit as costs are seldom classified
into fixed &variable.
Only variable cost are charged to products .marginal cost technique does not lead to over or under
absorption of fixed overheads.
The technique of marginal costing is very helpful in taking managerial decisions because it takes into
consideration the additional cost involved only assuming fixed expenses remaining constant.
Cost are classified according to the behaviour of cost i.e. fixed cost and variable cost.
Cost ,volume and profit relationship is an integral part of marginal cost studies as costs are classified
into fixed and variable costs.

Activity based costing system has the following main advantages / benefits:
 1. More accurate costing of products/services, customers, SKUs, distribution
channel.
2. Better understanding overhead.
3. Easier to understand for everyone.
4. Utilizes unit cost rather than just total cost.
5. Integrates well with Six Sigma and other continuous improvement programs.
6. Makes visible waste and non-value added activities.
7. Supports performance management and scorecards.
8. Enables costing of processes, supply chains, and value streams
9. Activity Based Costing mirrors way work is done
10. Facilitates benchmarking

These limitations or disadvantages are briefly discussed below:

1. Implementing an ABC system is a major project that requires substantial

resources. Once implemented an activity based costing system is costly to
maintain. Data concerning numerous activity measures must be collected,
checked and entered into the system.
2. ABC produces numbers such as product margins, that are odds with the numbers
produced by traditional costing systems. But managers are accustomed to using
traditional costing systems to run theirs operations and traditional costing
systems are often used in performance evaluation.
3. Activity based costing data can be easily misinterpreted and must be used with
care when used in making decisions. Costs assigned to products, customers and
other cost objects are only potentially relevant. Before making any significant
decision using activity based costing data, managers must identify which costs
are really relevant for the decisions at hand.
4. Reports generated by this systems do not conform to generally accepted
accounting principles (GAAP). Consequently, an organization involved in activity
based costing should have two cost systems - one for internal use and one for
preparing external reports.

What is the difference between a cost centre and a

profit center?
A cost center is a subunit of a company that is responsible only for its costs. Example of cost centers
are the production departments and the service departments within a factory and administrative
departments such as IT and accounting.

A profit center is a subunit of a company that is responsible for revenues and costs. Often a division
of a company is a profit center because it has control over its revenues, costs, and the resulting
profits.

Cost centers and profit centers are usually associated with planning and control in
a decentralized company.
What is a cost center?
A cost center is often a department within a company. The manager and employees of a cost center
are responsible for its costs but are not responsible for revenues or investment decisions.

A manufacturer's cost centers include each of its production departments as well as the
manufacturing service departments such as the maintenance department or quality control
department. Other examples of cost centers include the human resource department, the IT
department, the accounting department, and so on.

Cost centers are not limited to departments. There might be several cost centers within a
department. For example, each assembly line could be a cost center. Even a special machine could
be a cost center.

Cost centers are usually associated with the topic of decentralization, responsibility accounting, and
planning and control.

What is a 'Profit Center'

A profit center is a branch or division of a company that is accounted for on a
standalone basis for the purposes of profit calculation. A profit center is responsible
for generating its own results and earnings, and as such, its managers generally
have decision-making authority related to product pricing and operating expenses.
Profit centers are crucial in determining which units are the most and least profitable
within an organization

Definition of Cost Control

Cost Control is a process which focuses on controlling the total cost through
competitive analysis. It is a practice which works to maintain the actual cost in
agreement with the established norms. It ensures that the cost incurred on an
operation should not go beyond the pre-determined cost.

Cost Control involves a chain of functions, which starts from preparation of

the budget in relation to the operation, thereafter evaluating the actual
performance, next is to compute the variances between the actual cost & the
budgeted cost and further, to find out the reasons for the same, finally
to implement the necessary actions for correcting discrepancies.

The major techniques used in cost control are standard costing and budgetary
control. It is a continuous process as it helps in analysing the causes for
variances which control wastage of material, any embezzlement and so on.
 Definition of Cost Reduction

Cost Reduction is a process, aims at lowering the unit cost of a product

manufactured or service rendered without affecting its quality by using
new and improved methods and techniques. It ascertains substitute ways to
reduce the cost of a unit. It ensures savings in per unit cost and maximisation
of profits of the organisation.

Cost Reduction aims at cutting off the unnecessary expenses which occur
during the production, storing, selling and distribution of the product. To
identify cost reduction, the following are the major elements:

Savings in per unit cost.

No compromise with the quality of the product.
Savings are non-volatile in nature.

Key Differences Between Cost Control and Cost Reduction

The following are the major differences between Cost Control and Cost
Reduction:

1. The activity of maintaining cost as per the established norms is known as cost
control. The activity of decreasing per unit cost by applying new methods of
production in such a way that it does not affect the quality of the product is
known as cost reduction.
2. Cost Control focuses on decreasing the total cost while cost reduction focuses
on decreasing per unit cost of a product.
3. Cost Control is temporary in nature. Unlike Cost Reduction which is
permanent.
4. The process of cost control is completed when the specified target is achieved.
Conversely, the process of cost reduction has no visible end as it is a
continuous process that targets for eliminating wasteful expenses.
5. Cost Control does not guarantee quality maintenance. However, 100% quality
maintenance is assured in case of cost reduction.
6. Cost Control is a preventive function as it ascertains the cost before its
occurrence. Cost Reduction is a corrective action.