10 min readConcept sheetMCQ · break-even and margin of safety sums

Cost sheet, marginal costing and CVP analysis

A cost sheet builds cost stage by stage, from prime cost to cost of sales. Marginal costing charges only variable costs to products, giving contribution and break-even.

ContributionSales − variable cost = fixed cost + profit

P/V ratioContribution ÷ sales × 100, or change in profit ÷ change in sales

Break-even pointFixed cost ÷ contribution per unit (units), or fixed cost ÷ P/V ratio (₹)

Margin of safetyActual sales − break-even sales = profit ÷ P/V ratio

Cost sheet format

Stage	Built as
Prime cost	Direct material + direct labour + direct expenses
Works (factory) cost	Prime cost + factory overheads (+ opening WIP − closing WIP)
Cost of production	Works cost + office and administration overheads
Cost of goods sold	Cost of production + opening finished goods − closing finished goods
Cost of sales	Cost of goods sold + selling and distribution overheads
Profit	Sales − cost of sales

Preparing a cost sheet

Problem

8,000 units were produced and sold for ₹4,20,000. Direct material ₹1,20,000; direct labour ₹80,000; direct expenses ₹20,000; factory overheads ₹60,000; office and administration overheads ₹40,000; selling and distribution overheads ₹30,000. No opening or closing stocks.

Working

Prime cost = 1,20,000 + 80,000 + 20,000 = ₹2,20,000
Works cost = 2,20,000 + 60,000 = ₹2,80,000
Cost of production = 2,80,000 + 40,000 = ₹3,20,000 (₹40 per unit)
Cost of sales = 3,20,000 + 30,000 = ₹3,50,000 (₹43.75 per unit)
Profit = 4,20,000 − 3,50,000 = ₹70,000 (₹8.75 per unit)

Answer

Prime cost ₹2,20,000; works cost ₹2,80,000; cost of production ₹3,20,000; cost of sales ₹3,50,000; profit ₹70,000.

Marginal versus absorption costing

Marginal costingOnly variable manufacturing costs go into product cost and stock. Fixed costs are period costs, written off in full against contribution.

Absorption costingBoth variable and fixed manufacturing overheads are absorbed into product cost, so part of the fixed overhead is carried forward in closing stock.

Stock rising (production > sales): absorption profit is higher. Stock falling: marginal profit is higher. No stock change: both are equal.

Break-even and margin of safety

Problem

Selling price ₹50 per unit; variable cost ₹30 per unit; fixed costs ₹2,00,000; actual sales 15,000 units.

Working

Contribution per unit = 50 − 30 = ₹20; P/V ratio = 20 ÷ 50 = 40%
BEP = 2,00,000 ÷ 20 = 10,000 units, or 2,00,000 ÷ 0.40 = ₹5,00,000
Actual sales = 15,000 × 50 = ₹7,50,000; margin of safety = 7,50,000 − 5,00,000 = ₹2,50,000 (5,000 units), which is 33.33% of sales
Profit = 5,000 units × ₹20 = ₹1,00,000; check: MoS × P/V = 2,50,000 × 40% = ₹1,00,000
Sales for a target profit of ₹1,60,000 = (2,00,000 + 1,60,000) ÷ 0.40 = ₹9,00,000 (18,000 units)

Answer

BEP 10,000 units (₹5,00,000); margin of safety ₹2,50,000 (33.33%, rounded); profit ₹1,00,000; sales of ₹9,00,000 needed for a ₹1,60,000 profit.

P/V ratio from two periods

Problem

Period 1: sales ₹3,00,000, profit ₹30,000. Period 2: sales ₹4,00,000, profit ₹70,000. Fixed costs are the same in both periods.

Working

P/V ratio = change in profit ÷ change in sales = 40,000 ÷ 1,00,000 = 40%
Contribution in period 1 = 3,00,000 × 40% = ₹1,20,000
Fixed cost = contribution − profit = 1,20,000 − 30,000 = ₹90,000
BEP = 90,000 ÷ 0.40 = ₹2,25,000
Check with period 2: 4,00,000 × 40% − 90,000 = ₹70,000 profit

Answer

P/V ratio 40%; fixed cost ₹90,000; break-even sales ₹2,25,000.

CVP assumptions and terms

Costs split cleanly into fixed and variable; selling price and variable cost per unit stay constant.
Fixed costs stay constant over the relevant range; the sales mix is constant; production equals sales.
Angle of incidence: the angle at which the sales line cuts the total cost line. A wide angle means a high rate of profit.
Key (limiting) factor: when a resource is scarce, rank products by contribution per unit of that factor.

How NET asks this

NET gives two or three numbers and asks for BEP, P/V ratio, margin of safety or sales for a target profit, or asks you to order the cost sheet stages.

Exam angle

Typical MCQ: “Fixed cost ₹1,20,000; P/V ratio 30%; actual sales ₹6,00,000. What is the profit?” Contribution ₹1,80,000 − fixed cost ₹1,20,000 = ₹60,000. Trap: 30% of sales is contribution, not profit.

Typical MCQ: “Profit is ₹45,000 and the P/V ratio is 25%. What is the margin of safety?” 45,000 ÷ 0.25 = ₹1,80,000. Trap: multiplying instead of dividing.

Remember it

Contribution pays fixed costs first, then makes profit. BEP = F ÷ C; MoS = P ÷ PV.