Lecture 5- Long term costing

Question 1

What is the product cost in marginal and absorption costing?

Answer 1

The product cost consists only of variable costs in marginal costing.
The product cost in absorption costing is all manufacturing costs.

Question 2

What is contribution?

Answer 2

Contribution is the difference between sales revenue and variable cost. We work out contribution after all variable costs, including non-manufacturing variable costs

Question 3

What are advantages of marginal costing?

Answer 3

• closer link between sales and profit, and effect of inventory changes is removed from profit calculation
• Provides much better information for decision making (e.g. special selling price decisions)
• No issues of over/under recoveries, avoids risk of capitalizing MFO in unsold inventory

Question 4

What are advantages of absorption costing?

Answer 4

• products are charged with all costs of manufacture so it is better for external profit reporting
• underlines the importance of fixed costs, which are essential to businesses
• it avoids fictitious losses

Question 5

What is cost volume profit analysis?

Answer 5

CVP attempts to explain the relationship between:

• volumes
• revenues
• profits

Question 6

What is the break-even point?

Answer 6

The break-even point is the volume or sales needed to achieve a No-profit, No-loss position

It is found by dividing the total fixed costs by contribution per unit

Question 7

How do you calculate the contribution margin ratio?

Answer 7

Contribution/sales revenue x100

Question 8

How do you calculate the margin of safety?

Answer 8

(Actual units sold-Units at BEP)/actual Units x100