Make or Buy Decisions in Marginal Costing

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Questions and Answers

In the context of marginal costing, how is decision making simplified in make or buy scenarios?

By bifurcating total costs into fixed and variable components

Why is the application of absorption costing considered misleading in make or buy decisions?

It does not consider variable costs

How does marginal costing ensure a more realistic valuation of stock compared to other methods?

By valuing stocks at variable costs only

What does marginal costing provide to help maintain or achieve a desired level of profits?

Information on reducing variable costs or increasing selling price Signup and view all the answers

How does marginal costing facilitate cost control compared to other costing methods?

By separating fixed and variable costs for better cost control Signup and view all the answers

In what context are key factor problems relevant in businesses?

When facing constraints limiting business operations Signup and view all the answers

What helps in better evaluation of different divisions based on cost-volume-profit analysis?

Contribution ratio Signup and view all the answers

Why is responsibility accounting more effective when based on marginal costing?

Managers' responsibilities are evaluated based on contribution Signup and view all the answers

In the short-run, what remains consistent in marginal costing, facilitating better decision making?

Marginal cost per unit of output Signup and view all the answers

Which factor is considered when making buy or make decisions in marginal costing?

Contribution margin Signup and view all the answers

What does marginal costing help in maintaining for a business operation?

Desired level of profit Signup and view all the answers

How does marginal costing contribute to realistic valuation of stock?

By focusing on variable costs Signup and view all the answers

What is a challenge in adopting marginal costing in capital intensive industries?

Difficulty in distinguishing between fixed and variable costs Signup and view all the answers

Why is it not advisable to fix selling prices based solely on contribution under marginal costing?

Risk of selling too much at marginal cost Signup and view all the answers

What is a limitation of using marginal costing for performance evaluation?

Lack of standard for evaluation Signup and view all the answers

How does marginal costing help in maintaining the desired level of profit?

Helping ascertain the lowest selling price per unit without loss Signup and view all the answers

Why may fixing selling prices under marginal costing be challenging in 'cost plus contracts'?

'Cost plus contracts' may conflict with marginal costing principles Signup and view all the answers

Why is it difficult to adopt marginal costing in multi-product businesses?

Challenges in calculating contribution margins Signup and view all the answers

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