Chapter 6.3 Marginal Costing Flashcards
What does marginal costing exclude?
Marginal costing excludes fixed overhead production costs from the cost of sales
How does marginal costing influence organisational budgeting?
It provides a different perspective on costs compared to absorption costing
What two components do costs get separated into under marginal costing?
Fixed and variable components
What do fixed costs do regardless of production levels?
Remain constant
What do variable costs change in direct proportion to?
Production activity and levels
What is the contribution margin?
The difference between sales revenue and variable costs
Why is knowing the contribution margin important when preparing budgets?
It enables more accurate profit forecasts
What is the break-even point?
The point at which the total contribution margin covers fixed costs
How does marginal costing assist in pricing strategy?
It ensures selling prices cover the variable costs associated with producing a product
What does marginal costing help organizations decide regarding product lines?
Promoting, scaling down, or discontinuing certain products
How does marginal costing aid in cost control?
It involves managing variable costs effectively
Why is marginal costing useful for short-term decision-making?
It assesses the impact of changes in volume on profitability
What analysis does marginal costing enable in budgeting?
Sensitivity analysis
How can budget planners use sensitivity analysis?
By varying volume assumptions to assess changes in sales levels and budgeted profits
How does marginal costing assist in setting profit targets?
By determining the level of sales needed to achieve specific profit targets
