Marginal costing vs Total Absorption costing (4)

Question 1

Define period cost

Answer 1

Period costs are costs charged in full to the profit and loss account in the period in which they are incurred

Question 2

Define product cost

Answer 2

Product costs are costs that are included in inventory valuation. Therefore product costs are matched against the sales revenue they generate.

Question 3

How does the marginal costing and absorption costing methods differ in their classification of fixed production costs?

Answer 3

Marginal costing treats fixed production costs as a period cost.

Absorption costing treats fixed production costs as a product cost.

Question 4

What is the formula for calculating contribution?

Answer 4

Contribution = Sales price - variable production costs (inventory valuation) - variable non-production costs

Question 5

If closing inventory > opening inventory, which is bigger between MC and TAC?

Answer 5

If closing inventory > opening inventory then TAC > MC

If closing inventory < opening inventory then TAC < MC

If closing inventory = opening inventory then TAC = MC

Question 6

How can we convert marginal costing profit to absorption costing profit?

Answer 6

Marginal costing profit - ((closing inventory - opening inventory) x OAR) = absorption costing