marginal costing

Question 1

DIRECT COST

Answer 1

a cost that can be identified directly with each unit of output. The most common examples of direct costs are materials and labour, as well as expenses such as royalties.

Question 2

INDIRECT COST

Answer 2

a cost that cannot be identified directly with each unit of output.
It is also called an overhead. Examples include rent, salaries of non-production staff, insurance and office expenses.

Question 3

VARIABLE COSTS

Answer 3

immediately change in proportion to the level of output or number of goods sold. Examples include materials/purchases and packaging.
In exam questions, these are often stated as ‘per unit’ or ‘per customer’.

Question 4

FIXED COSTS

Answer 4

do not immediately change due to a change in output or the number of goods sold. Examples include rent, salaries and advertising.
In exam questions, these are often stated as ‘per month/week/year.

Question 5

STEPPED COSTS

Answer 5

costs that are fixed up to a certain level of output, beyond which they increase to a higher level of fixed costs. This may be due to needing additional premises or employees.

Question 6

SEMI-VARIABLE COST

Answer 6

cost where part of it is fixed and part of it is variable. Examples include telephone (rental in fixed, calls are variable), power (heat & light is fixed, use of machinery is variable) and wages (basic pay is fixed, overtime is variable).

Question 7

marginal cost

Answer 7

the cost of producing one extra unit.
It is the sum of the variable costs of producing that extra unit.

Question 8

CONTRIBUTION PER UNIT

Answer 8

Selling price – Variable cost per unit.

Question 9

TOTAL CONTRIBUTION

Answer 9

Contribution per unit x number of units sold
Total contribution is also equal to Revenue – Variable costs.

Question 10

CALCULATING THE BREAK-EVEN POINT in number of units

Answer 10

Fixed costs ÷ contribution per unit

Question 11

CALCULATING THE MARGIN OF SAFETY

Answer 11

Actual level of sales – Break even point.

Question 12

CALCULATING THE LEVEL OF SALES NEEDED FOR A TARGET PROFIT

Answer 12

(Fixed costs + Target profit) ÷ contribution per unit

Question 13

CONTRIBUTION SALES RATIO

Answer 13

Contribution per unit ÷ Selling price

Question 14

The contribution sales ratio can be used to calculate the break-even point in revenue

Answer 14

Fixed costs ÷ Contribution sales ratio

Question 15

It can also be used to calculate the revenue needed to achieve a target profit

Answer 15

(Fixed costs + Target profit) ÷ Contribution sales ratio

Question 16

BENEFITS OF BREAK-EVEN ANALYSIS

Answer 16

⮚ To assess the viability of a new business: i.e. how likely it is to be successful
⮚ To set sales targets to help achieve the objectives of the business.
⮚ To evaluate changes to the business
⮚ To support applications for bank loans

Question 17

LIMITATIONS OF BREAK-EVEN ANALYSIS

Answer 17

⮚ Assumptions about costs and selling prices may be incorrect
⮚ Fixed costs eventually increase in order to go beyond certain levels of output
⮚ Assumptions about how likely a business is to achieve the target level of sales may be incorrect