Marginal Costing And Pricing Decisions - 25%

Question 1

What is a marginal cost?

Answer 1

This is the cost of one unit of product/service which would be avoided if that unit were not produced/ provided

Question 2

What do marginal cost per unit consist of ?

Answer 2

• direct material
• direct labour
• variable production overheads

Question 3

What is the formula for contribution per unit ?

Answer 3

Selling price - variable ( marginal ) cost

Question 4

What is the formula for total contribution ?

Answer 4

Sales revenue - variable ( marginal) costs of sales

Question 5

What is the formula for profit

Answer 5

Total contribution - fixed costs

Question 6

What are the 6 principles of marginal costing ?

Answer 6

• only variable costs are charged as cost of sales
• closing inventory is valued at marginal cost
• fixed costs are treated as period costs
• period costs are charged in full against profit
• if sales increase by one unit, profit will increase by the contribution from one unit
• contribution per unit is constant at all levels of output and sales

Question 7

What consists of an absorption costing profit statement

Answer 7

Sales
Opening inventory ( at full cost )
Full production costs ( variable costs + absorption fixed overheads)
Less closing inventory ( at full cost )
Production costs of sales
Under/overabsored overheads
Total production costs
Gross profit
Other costs
Net profit

Question 8

What consists of an marginal costing profit statement

Answer 8

Sales
Opening inventory ( at variable cost)
Variable production costs
Less closing inventory ( at variable cost)
Variable production costs of sales
Contribution
Fixed production costs
Gross profit
Other fixed costs
Net profit

Question 9

When does marginal costing show a greater profit

Answer 9

If the opening inventory volumes are greater than closing inventory volumes, marginal costing shows the greater profit

Question 10

Reconciling profit figures
Absorption & marginal costing

Answer 10

adjust for fixed overheads in inventory + inventory increase in units x fixed overheads absorbed per unit ————> Marginal costing

OR

Inventory decrease in units x fixed overheads absorbed per unit ——> absorption costing

Question 11

What is the formula for full cost plus pricing ?

Answer 11

Full cost of the product + % mark-up for profit = sales price

Question 12

Marginal cost plus pricing / mark-up pricing

Answer 12

Marginal cost ( or marginal cost of sales ) + % mark-up for profit = sales price

Question 13

Marginal cost card

Answer 13

• relates to only variable costs
• direct labour
• direct material
• variable overheads
  = cost per unit