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3. Marginal Costing Flashcards

1
Q

Define marginal costing

A

The variable cost of a product or a service - cost that would be avoided if the unit was not produced or provided

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2
Q

Define Period costs

A

Costs relating to a time period rather than the production of a product/service

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3
Q

What is meant by contribution

A

contirbution towards profit

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4
Q

What is the formula for contribution

A

Contribution per unit = selling price per unit - all variable costs per unit

Total contribution = total sales revenue - total variable costs

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5
Q

How do you work ut the difference between two absorption profit and marginal cost figures

A

OAR per unit x Change in inventory

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6
Q

In which case would you profit for absorption cost be higher than cost

A

S: stocks
I: Increase
A: absorption profit
M:more

Or
When sales = production, inventory is constant so AC Profit = MC profit

When Sales > production, inventory is falling so AC Profit < MC profit

When slaes < production, Inventory is increasing so AC > MC profit

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7
Q

What are the advantages of marginal costing

A
  • Most appropriate for decision making due to contribution
  • Good for short term
  • Fixed costss are treated with nature as period costs
  • Profit depends on sales and efficiency not production
  • Slightly simpler variance analysis
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8
Q

What are the disadvatages to marginal costing

A
  • Products will be sold on ongoing basis at marginal contribution which fails to cover fixed costs
  • Does not comply with IAS 2 inventories so requirements year end adjustments
  • Necessitates analysis of mixed costs between fixed and variable
  • Seasonal variations in year can cause unecssary profit variances
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9
Q

Compare MC and AC

A
  • MC is commonly used for decision making in the short term
  • ABC and AC give a more accurate product profitability breakdown
  • MC may provide incorrect decision making information especially when fixed costs are large compared to variable
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10
Q

What is meant by full cost plus pricing

A

This is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark up for profit

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11
Q

What are the issues with using full cost plus prices

A
  • Fails to recognisse demand may determine price : profit maximising combination of price and demand
  • Adjust prices to market and demand conditions
  • Budgeted output volume needs to be established to work out OAR
  • Suitable basis for Overhead absorption must be selected
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12
Q

What is meant by marginal cost plus/ mark up pricing

A

Method of determining the sales price by adding aa profit margin onto either the marginal cost of production or marginal cost of sale

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13
Q

How do you work out marginal cost

A

Total variable costs

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14
Q

What are the advatages of marginal cost plus pricign

A
  • Simple and easy
  • Mark up percent can be varied to reflect demand
  • Draws management attention to contribution
  • Used where there is readily identifiable basic variable cost
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15
Q

What are the disadvatages of marginal cost plus pricing

A
  • Does not ensure sufficient attention is paid to demand conditions competitiors prices and profit maximisaiton
  • Ignores fixed overheads
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16
Q

What are the four Cs when cosnidering price

A
  • Customer: what are customers willing to pay
  • Cost: how much it costs to make
  • Competition: what are competitors charging
  • Corporate strategy: what are company’s aim
17
Q

Define theory of constraints

A

A production system where key financial concept is the maximisation of throughput while keeping conversion and investment costs to a minimum
- Minimise throughput time or maximise speed

18
Q

What is throughput time

A

Time taken to convert raw materials into finished goods

19
Q

What constraints are focused on TOC

A

Bottlenecks - act as a barrier to throughput maximisation

20
Q

What is Goldratt’s five steps for dealing with bottleneck activity

A
  • Step 1: Identify: binding constraint/bottleneck
  • Step 2: Exploit: the highest possible output achieved from binding constraint and hold buffer inventory for this
  • Step 3: Subordinate : operations prior to binding constraint should ooperate at same speed so WIP does not build up
  • Step 4: Elevate: systems by taking steps to increase resources
  • Step 5: Return: to step 1 to remove bottleneck created elsewhere
21
Q

How do you work out Throughput contribution/return

A

Sales revenue - direct material cost

22
Q

How do you wokr out conversion cost

A

All operating costs except direct material costs (all costs except totally variable costs)

23
Q

Explain features of Throughput accounting

A
  • Used for longer term decision making about production capacity
  • JIT environment
  • WIP is valued at material cost only as no value is added until profit is made
  • only variable cost is materials - all other factory costs are fixed including labour
  • Profit is determined by rate at which throughput can be generated: how quickly raw materials is turned into sales
24
Q

What ratios are important in Throughput return accounting

A
  • throughput return per factory hour
  • total factory costs per period
  • throughput cost per factory hour
  • throughput accounting ratio
25
Q

Formula for throughput return per factory hour

A

Throughput return per unit/ hours to produce one unit on bottleneck

26
Q

Formula for total factory costs per period

A

Fixed production costs including labour

27
Q

Formula for throughput cost per factory hour

A

Total factory costs per period/ total bottleneck hours per period

28
Q

Formula for throughput accounting ratio

A

Throughput return per factory hour/ throughput cost per factory hour

29
Q

How is TA ratio beneficial

A
  • Products can be ranked
  • TA ratio should be less than 1 if a product is to be viable
  • Priority can be given to products generating the best ratios
30
Q

How to work out throughput contribution

A

Sales rpcie - Material cost

31
Q

Will closing inventory valuation be higher or lower in MC or AC

A

Closing inventory valuation under absorption costing will always be higher than under marginal costing because of the absorption of fixed overheads into closing inventory values.

The profit under absorption costing will be greater because the fixed overhead being carried forward in closing inventory is greater than the fixed overhead being written off in opening inventory.

32
Q

Which costing is mroe usefu for one off pricing decisions

A

Marginal costing

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