Lecture 3 - Marginal costing and ABC

Question 1

Designing an ABC system - 4 Steps:

Answer 1

Step 1 - Identify the main activities in the organisation
Step 2 - Collect the costs of each activity into a cost pool (Direct and indirect)
Step 3 - Identify factors which determine the cost of an activity - Cost drivers
Step 4 - Charge overheads to products based on their usage of activity

Question 2

What are the 4 general levels of activity recognised in ABC?

Answer 2

• Unit level activities (Machine hours, labour activities)
• Batch level activities (Setting up machines, quality inspection)
• Product level activities (Product testing and product design)
• Facility level activities (Plant occupancy, grounds maintenance)

Question 3

Limitations of ABC:

Answer 3

• Less useful in organisations with minimal overheads but large direct labour and materials
• It is costly
• Time consuming

Question 4

Marginal costing is also known as variable costing, this is because….

Answer 4

The costing method traces all variable costs to products

Question 5

What is marginal costing used for?

Answer 5

• To provide information for short-term planning and decision making
• In routine cost accounting

Question 6

Contribution for marginal costing is calculated as…

Answer 6

Sales revenue - marginal cost of sales

Question 7

Benefits of marginal costing:

Answer 7

• Easy to understand
• No apportionments of overheads
• Closely resembles the actual cash flow situation

Question 8

If inventory levels increase, then absorption costing profits will be….

Answer 8

Greater than marginal costing profit

Question 9

If inventory levels decrease, then Absorption costing profits will be….

Answer 9

Less than marginal costing profits