Podcast
Questions and Answers
In the context of marginal costing, how is decision making simplified in make or buy scenarios?
In the context of marginal costing, how is decision making simplified in make or buy scenarios?
Why is the application of absorption costing considered misleading in make or buy decisions?
Why is the application of absorption costing considered misleading in make or buy decisions?
How does marginal costing ensure a more realistic valuation of stock compared to other methods?
How does marginal costing ensure a more realistic valuation of stock compared to other methods?
What does marginal costing provide to help maintain or achieve a desired level of profits?
What does marginal costing provide to help maintain or achieve a desired level of profits?
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How does marginal costing facilitate cost control compared to other costing methods?
How does marginal costing facilitate cost control compared to other costing methods?
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In what context are key factor problems relevant in businesses?
In what context are key factor problems relevant in businesses?
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What helps in better evaluation of different divisions based on cost-volume-profit analysis?
What helps in better evaluation of different divisions based on cost-volume-profit analysis?
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Why is responsibility accounting more effective when based on marginal costing?
Why is responsibility accounting more effective when based on marginal costing?
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In the short-run, what remains consistent in marginal costing, facilitating better decision making?
In the short-run, what remains consistent in marginal costing, facilitating better decision making?
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Which factor is considered when making buy or make decisions in marginal costing?
Which factor is considered when making buy or make decisions in marginal costing?
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What does marginal costing help in maintaining for a business operation?
What does marginal costing help in maintaining for a business operation?
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How does marginal costing contribute to realistic valuation of stock?
How does marginal costing contribute to realistic valuation of stock?
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What is a challenge in adopting marginal costing in capital intensive industries?
What is a challenge in adopting marginal costing in capital intensive industries?
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Why is it not advisable to fix selling prices based solely on contribution under marginal costing?
Why is it not advisable to fix selling prices based solely on contribution under marginal costing?
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What is a limitation of using marginal costing for performance evaluation?
What is a limitation of using marginal costing for performance evaluation?
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How does marginal costing help in maintaining the desired level of profit?
How does marginal costing help in maintaining the desired level of profit?
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Why may fixing selling prices under marginal costing be challenging in 'cost plus contracts'?
Why may fixing selling prices under marginal costing be challenging in 'cost plus contracts'?
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Why is it difficult to adopt marginal costing in multi-product businesses?
Why is it difficult to adopt marginal costing in multi-product businesses?
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Study Notes
Decision-Making in Make or Buy Scenarios
- Marginal costing simplifies decision-making by focusing on variable costs, helping businesses assess financial impacts of in-house production versus purchasing.
- Absorption costing can mislead decisions as it includes fixed costs in product costs, leading to potentially erroneous conclusions about profitability.
Valuation of Stock
- Marginal costing provides a realistic stock valuation by only considering variable costs, which aligns inventory values more accurately with current production expenses.
- Under absorption costing, stock values can become inflated by including fixed overheads, distorting true profitability.
Profit Maintenance
- Marginal costing offers insights into cost behavior and contribution margins, essential for maintaining or achieving targeted profits.
- It allows businesses to identify necessary sales levels to cover variable costs and maintain desired profit margins.
Cost Control
- Marginal costing facilitates effective cost control by clearly distinguishing fixed and variable costs, enabling managers to monitor and manage costs more effectively.
- It emphasizes direct variable costs, which can be adjusted more readily to respond to changes in business conditions.
Key Factor Problems
- Key factor problems arise when limited resources hinder production capacity. They help prioritize resource allocation and optimize profitability.
Cost-Volume-Profit Analysis
- Cost-volume-profit analysis under marginal costing allows better evaluation of different divisions by examining their contribution margins and variable costs directly.
- This analysis assists in understanding how varying sales levels affect profitability and resource utilization.
Responsibility Accounting
- Responsibility accounting is more effective with marginal costing as it aligns performance assessment with controllable costs, simplifying accountability for managers.
Consistency in Decision Making
- In the short-run, variable costs remain consistent within marginal costing, aiding predictability and decision-making regarding production and pricing.
Buy or Make Decisions
- When making buy or make decisions, marginal costing emphasizes the variable cost impact of each option, facilitating informed choices based on direct costs.
Maintenance of Business Operations
- Marginal costing helps maintain operational efficiency by ensuring that decisions are aligned with variable cost management and profitability targets.
Challenges in Capital Intensive Industries
- Adopting marginal costing in capital-intensive industries can be challenging due to high fixed costs, which may be underrepresented in variable cost analyses.
Selling Prices and Contribution
- Fixing selling prices solely based on contribution under marginal costing may not account for necessary recovery of fixed costs, risking profit margins.
Performance Evaluation Limitations
- A limitation of marginal costing for performance evaluation is its potential oversimplification, which might neglect long-term fixed cost implications.
Maintaining Desired Profit Levels
- Marginal costing aids in maintaining desired profit levels by providing relevant data on cost behavior and margin contributions for setting sales targets.
Challenges in 'Cost Plus Contracts'
- Fixing selling prices under marginal costing in cost-plus contracts can be challenging as it may overlook the importance of fixed costs in overall pricing strategies.
Multi-Product Business Complexity
- In multi-product businesses, adopting marginal costing may be difficult due to the varying contribution levels and resource allocations required for different products.
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Description
This quiz covers how marginal costing helps in decision-making between in-house manufacturing and market purchase of components. Learn about bifurcation of total costs, comparison of variable costs, and the application of marginal costing over absorption costing for accurate decision-making.