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What is marginal cost as understood in economics?
What is marginal cost as understood in economics?
The incremental cost of production for producing one additional unit of product.
Fixed costs remain constant irrespective of the volume of production.
Fixed costs remain constant irrespective of the volume of production.
True
How is marginal cost measured?
How is marginal cost measured?
By the total variable cost attributable to one additional unit.
Marginal costing is a costing system where products or services and inventories are valued at variable costs only.
Marginal costing is a costing system where products or services and inventories are valued at variable costs only.
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What does not take consideration in marginal costing?
What does not take consideration in marginal costing?
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What is another name for marginal costing because only direct costs are involved?
What is another name for marginal costing because only direct costs are involved?
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Direct costing and Marginal Costing is synonymous.
Direct costing and Marginal Costing is synonymous.
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The relationship of cost must be understood with respect to activity level.
The relationship of cost must be understood with respect to activity level.
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Differential cost is the difference between the costs of two different production levels.
Differential cost is the difference between the costs of two different production levels.
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Incremental cost relates to costs that are incurred due to changes in volume or in the process of production activities.
Incremental cost relates to costs that are incurred due to changes in volume or in the process of production activities.
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Marginal cost is synonymous with incremental cost.
Marginal cost is synonymous with incremental cost.
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Under marginal costing, the value of finished goods and work-in-progress includes variable selling and distribution costs.
Under marginal costing, the value of finished goods and work-in-progress includes variable selling and distribution costs.
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Under marginal coating, fixed costs are treated as period costs and they are charged to the profit and loss account for the period for which they are incurred.
Under marginal coating, fixed costs are treated as period costs and they are charged to the profit and loss account for the period for which they are incurred.
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Prices are determined with reference to marginal costs and contribution margin.
Prices are determined with reference to marginal costs and contribution margin.
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The profitability of departments and products is determined with reference to fixed costs.
The profitability of departments and products is determined with reference to fixed costs.
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Marginal costing is a distinct method of costing.
Marginal costing is a distinct method of costing.
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Cost Ascertainment is made on the basis of the nature of cost.
Cost Ascertainment is made on the basis of the nature of cost.
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The traditional or total cost method classifies cost on a functional basis.
The traditional or total cost method classifies cost on a functional basis.
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Under the total cost method, the total cost per unit will remain constant when the level of output of mixture is the same from period to period.
Under the total cost method, the total cost per unit will remain constant when the level of output of mixture is the same from period to period.
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The application of marginal costing is recognized in the field of decision making.
The application of marginal costing is recognized in the field of decision making.
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Fixed production costs are not included in the value of products in marginal costs.
Fixed production costs are not included in the value of products in marginal costs.
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Fixed costs are charged against the contribution margin.
Fixed costs are charged against the contribution margin.
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The contribution margin shows the margin of profit.
The contribution margin shows the margin of profit.
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The contribution margin is the difference between sales revenue and total variable costs.
The contribution margin is the difference between sales revenue and total variable costs.
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The contribution margin is calculated by subtracting the variable cost from the selling price.
The contribution margin is calculated by subtracting the variable cost from the selling price.
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Finished goods are valued at variable cost only.
Finished goods are valued at variable cost only.
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Work-in-progress (WIP) inventories are valued at product cost.
Work-in-progress (WIP) inventories are valued at product cost.
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Absorption Costing is the practice of charging all costs, both variable and fixed, to operations, processes, or product.
Absorption Costing is the practice of charging all costs, both variable and fixed, to operations, processes, or product.
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Fixed expenses in absorption costing are distributed based on the absorption costing basis.
Fixed expenses in absorption costing are distributed based on the absorption costing basis.
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Under absorption costing, fixed expenses are assigned to a specific process or product, and they are based on predetermined level of activity.
Under absorption costing, fixed expenses are assigned to a specific process or product, and they are based on predetermined level of activity.
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Under absorption costing, pre-determined levels of output are considered to determine recovery of fixed expenses.
Under absorption costing, pre-determined levels of output are considered to determine recovery of fixed expenses.
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Under absorption costing, fixed expenses are recovered on a pre-determined level based on the estimated output.
Under absorption costing, fixed expenses are recovered on a pre-determined level based on the estimated output.
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Under marginal costing the contribution margin is used for the recovery of fixed expenses.
Under marginal costing the contribution margin is used for the recovery of fixed expenses.
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Study Notes
Marginal Costing
- A costing system where only variable costs are considered for product costs and inventory valuation.
- Fixed costs are treated as period costs.
Cost-Volume-Profit (CVP) Analysis
- A managerial tool to show the relationship between cost, volume, and profit.
- It explores the relationship between costs, revenue, activity levels, and the resulting profit.
- It aims to measure variations in cost and volume.
Break-Even Analysis
- A method used to study Cost-Volume-Profit analysis.
- In a narrow sense, it is concerned with computing the break-even point, which is when total costs equal total sales revenue.
- In a broader sense, it determines possible profit/loss at different production or sales levels.
- Can be conducted using algebraic computations or graphic presentations.
Margin of Safety
- The difference between the expected level of sales and the break-even sales. The higher the margin, the higher the chances of making profits.
- Margin of Safety = Projected sales - Break-even sales
- Or, calculated as Profit / P/V ratio
Absorption Costing
- A costing method wherein all costs, both variable and fixed, are charged to products or operations, processes, or products.
- Fixed overhead costs are distributed across products based on a predetermined level of output.
Key Differences Between Marginal Costing and Absorption Costing
- Treatment of Fixed Costs: Marginal costing treats fixed costs as period costs, while absorption costing treats them as product costs.
- Inventory Valuation: Marginal costing values inventory only at variable costs, whereas absorption costing includes both variable and fixed costs.
- Profit Determination: Profit in marginal costing is determined by deducting total variable costs and fixed costs from revenue, while in absorption costing, profit is calculated by deducting the total cost of goods sold from revenue.
- Marginal Costing's Usefulness: Marginal costing is widely used for decision-making in the short term, whereas absorption costing is more appropriate for long-term financial reporting and preparing financial statements for external stakeholders.
Cost Ascertainment under Marginal Costing
- Cost ascertainment in marginal costing is based on how costs behave; the technique has been developed from a particular conception of the nature and behavior of costs.
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