Marginal Costing Flashcards
What is the purpose of costing?
Inventory valuation
Record costs
Price products
Decision making
What is a fixed cost?
a cost which is incurred for an accounting period which tends to be unaffected by changes in output
What is a variable cost?
a cost that varies with changes in activity
What is a semi variable cost?
a cost that contains fixed and variable components
What is included in the cost per unit?
Direct material
Direct labour
Direct expenses
Variable overheads
How do you calculate contribution?
Contribution = Sales–Variable cost of sales
How do you calculate profit in marginal costing?
Contribution – Fixed costs
What does the marginal costing profit statement look like?
Sales x Less variable cost of sales Opening stock x Variable production costs x x less Closing stock (x) x Less Variable selling distribution+admin costs(x) Contribution x Less fixed costs Production costs x Selling, distribution and admin. x Total fixed costs (x) Profit/(loss) x
What are the advantages of marginal costing?
It is a simpler costing system
Variable production cost is a more realistic estimate of inventory value
Reflects the behaviour of costs in relation to activity
What are the disadvantages of marginal costing?
When fixed costs are high the marginal cost of production is only a small proportion of total costs
Only really useful for short-term decision making
What does the reconciliation of profits look like due to impact on stock values of fixed OH’s in marginal costing?
Absorption costing net profit X
Marginal costing net profit X
Difference X
Fixed overhead absorbed in stock
increase/(decrease) X/(X)
Net profit reported X
If outputs > sales does absorption costing report a higher or lower net profit?
Higher
If output < sales does marginal costing report a higher or lower net profit?
Higher
If output = sales what do both methods report the same?
Net profit
How do you calculate full cost pricing?
Estimate direct costs, add % for overheads and add % for profit
