Marginal costing and Absorption costing

Question 1

What is the short-cut absorption profit calculation?

Answer 1

Actual units sold x sales price/unit
Less actual units sold x full production cost
Add/less actual units produced x OAR - actual overhead
Less non-production costs

Question 2

What is marginal costing?

Answer 2

Only variable production costs included in the valuation of cost units
All fixed costs are treated as period costs

Question 3

What is a contribution?

Answer 3

Sales revenue - all variable costs
Contribution per unit = sales price per unit - variable costs per unit

Question 4

What is total profit?

Answer 4

Total contribution less fixed costs

Question 5

What are the key differences between absorption and marginal costing?

Answer 5

Marginal costing:
Cost units valued at variable production cost per unit
Inventory of finished goods valued using variable production cost

Question 6

How do you calculate the short-cut marginal profit?

Answer 6

Actual units sold x (sales price/unit - all variable costs/unit)
Less any fixed costs

Question 7

What are the “golden rules” of profit?

Answer 7

If inventory increases, ACP > MCP
If inventory decreases, ACP < MCP

Question 8

What is the general result for absorption and marginal profit?

Answer 8

AP = MP + change in inventory x OAR
MP = AP - change in inventory x OAR

Question 9

What are the advantages of absorption costing?

Answer 9

Fixed production costs incurred to make an output
Closing inventory valued on principle required by accounting standards
May not be clear if contribution is enough to cover fixed costs

Question 10

What are the advantages of marginal costing?

Answer 10

Simple
No apportionment of fixed costs
Fixed costs same regardless of output
Cost to produce an extra unit is variable production cost
Under/over absorption avoided
More useful for decision-making