Cost sheet, marginal costing and CVP

A cost sheet organises cost into prime cost (direct material + direct labour + direct expenses), works cost (prime cost + factory overheads), cost of production (works cost + office and administration overheads) and total cost (cost of production + selling and distribution overheads), with profit added to reach the selling price. Marginal costing separates variable from fixed cost and charges only variable cost to products; the difference between sales and variable cost is contribution, which first covers fixed cost and then becomes profit. Worked example: sales 500,000, variable cost 300,000, so contribution is 200,000 and the P/V ratio (contribution / sales) is 40% — every extra rupee of sales adds 40 paise toward fixed cost and profit.