Marginal Cost Techniques

Question 1

What is the Definition of Marginal Costing?

Answer 1

Based on the principle whereby variable production costs only are charged to cost units and fixed costs attributable to relevant period is written off in full against contribution for the period. Fixed costs=period costs.

Question 2

What are the 4 Advantages of Marginal Costing?

Answer 2

1. Most appro for decision making since it highlights contribution.
2. Fixed costs are treated according to nature- period costs
3. Profit depends on sale and effiency
4. Slightly simpler variance analysis.

Question 3

What are the Disadvantages of Marginal Costing?

Answer 3

1. If product is sold long term will fail to cover fixed costs.
2. Does not comply with IAS2.
3. Necessitates analysis of mixed costs between fixed and variable.
4. Seasonal variations in year can cause profit variances.

Question 4

What is Full-Cost Pricing?

Answer 4

Method of deter sales price by calculating the full cost of product and adding % mark up for profit.

Question 5

What are the 4 Problems with Full cost Pricing?

Answer 5

1. Fails to recognize price and demand.
2. Need to adjust prices to market and demand conditions.
3. Budgeted output volume needs to be established.
4. Suitable basis for overhead absorption must be selected.

Question 6

What ate the 4 advantages of Marginal-Cost Pricing?

Answer 6

1. Simple and easy method
2. Mark up % can be varied. Adjust to reflect demand.
3. Draws management attention to contribution.
4. Done in practice where there is a readily identifiable basic variable cost.

Question 7

What are the 4 C’s to consider before setting a price?

Answer 7

1. Cost
2. Customer
3. Competition
4. Corporate Strategy

Question 8

What is the definition of Theory of Constraints (TOC)?

Answer 8

A production system where key financial concept is maximization of throughput while keeping conversion and investment costs to a minimum.

Question 9

What ate Goldratt’s 5 steps to deal with bottleneck activity?

Answer 9

1. Identify bottleneck
2. Exploit. Highest possible outcome
3. Subordinate. Other operations operate at same speed.
4. Elevate systems of bottleneck. Steps taken to increase resources.
5. Return to step 1. Removal of bottleneck will create another elsewhere in system.

Question 10

What is the definition of Throughput Accounting (TA)?

Answer 10

Is an accounting system based on theory of constraints. Is very similar to marginal costing and can be used for long-term decision making about production capacity. Inventory minimization and cost control.

Question 11

What are the 3 features of Throughput Accounting (TA)?

Answer 11

1. Only variable cost is materials. All other costs are treated as fixed costs.
2. JIT producing solely for inventory is bad. Products should not be made unless there is a customer.
3. Profit determined by rate at which Throughput can be generated.

Question 12

When using Absorption Costing and Marginal Costing, how do we determine which profit will be higher?

Answer 12

S - Stocks
I- Increase
A- Absorption profit
M - More

Question 13

Explain the two points to consider when comparing marginal costing to ABC?

Answer 13

1. Short-term and Long-term Decisions = Marginal Costing is more commonly used for decision making purposes, by splitting costs into variable and fixed costs. Can only be used for short-term decisions. Although some costs may be fixed, others may be variable in relation to volume of production, may in fact be variable in relationship to some other cost driver.
2. Bases used to spread cost give more accurate product profitability = ABC spreads costs across a number of bases. Marginal costing would make no attempt to allocate these fixed costs to units and create false impression of costs of unit. Marginal costing might provide an incorrect decision making when making info, especially where fixed costs are larger than variable costs.