Marginal Costing

Question 1

Marginal Costing

Is an ____________ _________ of costing to ______________ costing.

In marginal costing, only _________ costs are charged as a cost of sale and a contribution is calculated which is sales revenue minus the variable ______ of _______.

___________ __________ of work in progress or ___________ ________ are valued at ______________ (_________) production cost.

Fixed costs are treated as a ________ cost, and are charged in full to the _________ and ______ account of the part of the accounting period in which they are incurred.
CIMA

Answer 1

Is an alternative method of costing to absorption costing.

In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated which is sales revenue minus the variable cost of sales.

Closing stocks of work in progress or finished goods are valued at marginal (variable) production cost.

Fixed costs are treated as a period cost, and are charged in full to the profit and loss account of the part of the accounting period in which they are incurred.
CIMA

Question 2

What is marginal cost
What is marginal cost of sales
What is the formula for contribution

Answer 2

• Marginal cost is the variable cost of one unit of product or service
• Marginal (or variable) cost of sales:

Opening inventory + marginal production cost (purchases) - closing inventory (at marginal cost) + variable selling costs

Contribution = sales revenue - marginal (or variable) cost of sales

Question 3

Principles of marginal costing

What is the effect of selling one extra item or sales volume falling by one item?

What should profit measurement therefore be based on?

The valuation of closing inventories should be?

Answer 3

• Period fixed costs are the same, for any volume of sales and production

  - Sell one extra item?
  - ↑ revenue by item’s sales value
  - ↑ costs by variable cost per unit
  - Hence, ↑profit by contribution

The reverse is true if sales volume falls by one item, i.e. ↓ profit by contribution

• Profit measurement should therefore be based on an analysis of total contribution
• The valuation of closing inventories should be at variable production cost

Question 4

Marginal cost

The part of one unit of product or service which would be __________ if that unit were not produced, or which would __________ if one extra unit were produced.

Answer 4

The part of one unit of product or service which would be avoided if that unit were not produced, or which would increase if one extra unit were produced.

Question 5

Contribution

Formula?
Can be expressed as (2)

Answer 5

• In marginal costing the variable costs are matched against the sales value for the period to highlight an important performance measure ; contribution
• contribution = sales value - variable costs
• contribution may be expressed in absolute terms or contribution per unit

Question 6

Contribution…Limiting factors

Why would contribution be linked to a limiting factor?
Examples?

Answer 6

• Contribution is often linked to a key or limiting factor to give a sum required to cover fixed overhead and profit
• e.g. contribution per machine hour, per direct labour hour or per kilo of scarce raw material

Question 7

Use of marginal costing (4)

Answer 7

• To provide information for short term planning and decision making
• In routine cost accounting

  - cost calculation
  - stock valuation

Question 8

Arguments for marginal costing

Answer 8

• easy to understand
• no apportionments of overhead, which are frequently arbitrary
• no over/under absorption of overhead
• fixed costs are incurred on a time basis (not related to activity) therefore it is logical to write them off in the period as incurred
• accounts prepared using marginal costing closely resemble the actual cash flow situation