Marginal Costing and Pricing Flashcards
What is marginal/variable costing?
assigns only variable costs to units while fixed costs are written off as period costs
Write our a marginal costing cost card?
direct materials direct labour direct expenses PRIME COST variable overheads VARIABLE PRODUCTION COST (marginal cost)- does not include fixed costs
is marginal cost greater or less than absorption costing?
lower as doesn’t include fixed costs
What is contribution?
Sales value- variable cost of sales
Sales revenue- variable costs= contribution
Contribution- fixed costs= profit
why do profits of marginal and absorption costing differ?
The inventory has changed- we do it to reconcile profits/losses -
If inventory levels are rising- AC profit greater than MC profit
If inventory levels are falling- AC profit is less than MC profit
how can you calculate the difference in profit figures?
movement in inventory (units) x Fixed OAR
What are the advantages of MC?
better for decision making, fixed costs are treated as period costs which they are, profit depends only upon sales- clearer performance evaluation
What are the disadvantages of MC?
does not comply with financial reporting standards, all costs must be split into fixed and variable, fixed costs are being incurred so cannot be ignored
What is full cost pricing?
Total cost+ percentage/value mark up
ads: profits will be made is budgeted sales are met, useful for contract work, mark-up % can be adjusted
disads: insufficient focus on market conditions and competition, may overprice for one off contracts
What is Marginal cost plus pricing?
Total variable cost+ mark up
ads: simple, useful in retail situations where many items are sold, mark up % can be adjusted, ignores fixed costs that must be covered in long run
what is marginal cost pricing?
typically only covers direct costs + variable overheads- no mark up is added on
ads: useful as minimum acceptable price for a one off piece of work or where there is spare capacity
disads: no use as a long-term pricing strategy since fixed costs must be covered to make a profit
competitive not sustainable
What would you have to do if you need to add a 20% mark up cost to selling prices?
If costs are 100,000 then times by 1.2 to get revenue (120,000) then minus costs from revenue to get profit
What to do if told 20% margin on sales? if costs are 100,000?
if costs are 100,000
revenue is costs divided by 0.8
profit again is revenue- costs
What to do for return on investment? Investment is 800,000. target return of 20%? each item costs $100 to make and they sell 5,000 units? what is the selling price?
Target return= 800,000 x 0.2= 160,000
Cost= 5,000 x 100= 500,000
target revenue= 500,000 + 160,000= 660,000
660,000 divided by 500= $132 each selling price
