Costing (marginal and product

Question 1

Product costing

Answer 1

The process of establishing the cost per unit of a product.

Question 2

Reasons for product costing

Answer 2

• to establish selling price
• to control costs (budget v actual)
• to help planning and decision making
• to value closing stock

Question 3

Step- fixed costs

Answer 3

Costs fixed within a certain range of activity but change outside of that range. e.g. rent is fixed but increased production leads to a need for more space .., rent increases.

Question 4

Overhead absorption rates

Answer 4

Are based on budgeted costs, not actual costs. e.g. per labour hour, per unit, per machine hour

Question 5

Limitations and assumptions of marginal costing

Answer 5

• Variable costs are assumed to be completely variable at all levels
• Does not allow for step-fixed costs, which most are
• Assumes that selling price per unit is constant and doesn’t allow for discounts
• Not all mixed costs can be separated easily

Question 6

Sensitivity analysis

Answer 6

Management technique to study the impact of changes in cost, revenue or profit. e.g. what is the net profit if the selling price goes up?

Question 7

Contribution-sales ratio

Answer 7

To calculate the break-even point when certain figures (variable costs, selling price, units) are unavailable.
Contribution Cont. per unit
—————— or —————–
Sales Selling price per unit

Question 8

Contribution

Answer 8

Sales - variable costs or Net profit+ fixed costs

Question 9

Break-even point (BEP)

Answer 9

The level of production at which the costs of production equal the revenues for a product.
Fixed costs
————— (in units/ always round up)
Cont. per unit

Question 10

Margin of safety

Answer 10

Sales - BEP

Question 11

Units needed to reach a given target profit

Answer 11

Contribution per unit