7 Marginal Costing and Decision making

Question 1

What are sunk costs?

Answer 1

= past costs.

As these have already been incurred they are irrelevant to a decision

Question 2

What are variable costs?

Answer 2

vary in direct proportion with activity (i.e., change in total in proportion to changes in the related level of total activity or volume).

Question 3

What are fixed costs?

Answer 3

remain constant over wide ranges of activity (i.e., do not change in total for a given time period despite wide changes in the related level of total activity or volume).

Question 4

What is opportunity cost?

Answer 4

is the value of the benefit sacrificed when one course of action is chosen in preference to an alternative.

Question 5

What is absorption costing?

Answer 5

looked at the total cost of a product this included direct costs (these tend to be variable) and overheads (these contain fixed and variable elements). Absorption costing is used in inventory valuation for financial accounting purposes and pricing and production decisions in the longer term (when all costs are variable) Relevant costing looks at short term decision making

Question 6

What is marginal costing?

Answer 6

cost of one additional unit of a good or service. Therefore the marginal cost is the variable cost. Under marginal costing fixed costs are ignored and decisions are based on marginal (variable costs and revenues).

Question 7

What are the relevant costs for decision making?

Answer 7

Variable costs are relevant

Opportunity costs are relevant