Marginal Costing

Question 1

What must a learn from marginal costing? P123

Answer 1

Calculate * 3
* prime, marignal , and full absorption cost
* profit - under marginal costings and abosrption costing
* impact of chaning inventoru levels on profit - marginal costing and absorption costing principles

Identify *3
* Difference between product and period costs
* difference between marginal costing and absoorption costings
* advantages of marginal costing

Question 2

What is marginal costs ? P124

Answer 2

• Variable costs
• one extra unit of output

Question 3

What does marginal costing require? P124

Answer 3

• recognises difference - costs varying with activity and those that do not
  *Identifiable by behaviour
• split into variable and fixed costs
• semi-variable costs to be identified

Question 4

Why is the costs for producing one extra unit under marginal costing always variiable? P124

Answer 4

• fixed costs incurred - irrespective of no of units

Question 5

What is a key part of marginal costing and what is the definition ? P124

Answer 5

• Contribution
• Unit contribution = difference between selling price per unit & variable cost per unit
• Total contribution = difference between total sales income & total variable cost

Question 6

Why is the difference called contribution ? P124

Answer 6

Amount available - covers total fixed assets of organisation

Question 7

What is total contribution only calculated on ? P125

Answer 7

• Units sold
• not units produced

Question 8

Why must total contributions be calculated based on units sold ? P125

Answer 8

• Accrual principle
• csts of sales - matched to number of goods sold
• adjusting for changes in inventory level

Question 9

How are fixed costs within marginal costing implemented into the statement of profit/ loss ? - P125

Answer 9

• Period costs
• directly to profit statement
• deducted from total contriibution - arrives at profit/loss for period

Question 10

What is the value of inventory based on , when using the marginal costing system? P126

Answer 10

Marginal cost per unit

Question 11

What does using marginal costing mean for fixed costs in the profit / loss statement ? P126

Answer 11

• Written off = period costs
• non carried over into next period

Question 12

What are the advantages of marginal costing ? P127

Answer 12

CRAP F
* C - Calculation of profit not dependent upon inventoruy levels
* R - relevant costs are required for decision making . fixed costs = non relevant
* A - Avoids arbitrary allocating and apportioning of overheads to production
* P - Period costs treating ( as with all overheads) - not carried over into future periods
* F - full absorption costs based pricing - lower volume of sales contributing to fixed production costs and profit

Question 13

How do absorptionn costs track fixed costs ? - P127

Answer 13

• included - statement of profit / loss
• part of costs of sales

Question 14

Why is the unit costs of a product higher under absorption costs than marginal costing ? P127

Answer 14

• includes element of fixed costs
• closinng inventory value = element of fixed costs
• carries to next accounting period

Question 15

How would the profit be intepreted when the closing inventory is the same as the opening inventory - numnber of units produceed in period = number of units sold in period ? P127

Answer 15

• Profit same using marginal costing - absorption costing