Costing Prefinals - Marginal and Absorption Costing

**MARGINAL COSTING AND ABSORPTION COSTING** **MARGINAL COSTING** - Producing an additional unit of output - In this method only variable cost are charged to cost units **ABSORPTION COSTING** - A principle whereby fixed and variable cost are allotted to cost unit - Cost per unit inc...

**MARGINAL COSTING AND ABSORPTION COSTING** **MARGINAL COSTING** - Producing an additional unit of output - In this method only variable cost are charged to cost units **ABSORPTION COSTING** - A principle whereby fixed and variable cost are allotted to cost unit - Cost per unit includes expenses and variable cost - "PRODUCT COSTING" - "FULL COSTING TECHNIQUE" **CONTRIBUTION TO GROSS MARGIN** - Difference between sales and the marginal cost of sales - Represent the amount each unit contributes toward absorbing fixed cost and generating profit - Deducting the variable cost from sales revenue for a business segment - Includes both fixed cost and profit **SPECIFIC DEFINITION OF CONTRIBUTION** - **CONTRIBUTION PER UNIT --** difference between selling price of a product or service and its marginal cost - **CONTRIBUTION IN TOTAL --** difference between the sales value and the marginal cost of transactions **CHARACTER OF CONTRIBUTION HAS THE FOLLOWING COMPOSITIONS UNDER VARIOUS CONDITIONS** - Selling Price Containing Profit **(SALES AT A PROFIT)** -- Contribution = Fixed Cost+Profit **( + )** - Selling Price at Cost **(NO PROFIT & NO LOSS )** -- Contribution = Fixed Cost **( = )** - Selling Price at a Loss **(SALES AT A LOSS)** -- Contribution = Fixed Cost -- Loss **( - )** **KEY TERMS ASSOCIATED WITH THE COMPUTATION OF CONTRIBUTION MARGIN** - **TOTAL COST OF PRODUCTION** -- **[overall cost of producing a unit of output]** includes DM, DL, AND OVERHEADS - **SALES VALUE** -- **[amount of money equivalent to a sold product or service]** - **OPENING STOCK** -- value of goods available for sale at the **[beginning of an inventory]** - **CLOSING STOCK** -- values of goods available for sale at the **[end of an inventory]** - **GROSS PROFIT** -- **[company revenue after deducting the cost associated with making and selling goods]** or the cost related to providing services DM **-- DIRECT MATERIALS** DL **-- DIRECT LABOR / WAGES** VO **-- VARIABLE OVERHEAD** FO **-- FIXED OVERHEAD** MC **-- MARGINAL COSTING** AC **-- ABSORPTION COSTING** OS **-- OPENING STOCK** CS **-- CLOSING STOCK** UP **-- UNIT PRODUCED** US **-- UNIT SOLD** SP **-- SELLING PRICE** SALES -- **AMOUNT OF SALES VALUE** TOTAL COST OF PRODUCTION -- **ABSORPTION COSTING ( DM + DL + VO + FO )** **COST VOLUME PROFIT AND BREAK EVEN ANALYSIS** **COST VOLUME PROFIT (CVP) ANALYSIS** - Determines **how changes in cost and volume affect a company's operating income and net income** - Assumes that **the volume of production drives cost and revenue** **OBJECTIVES OF CVP ANALYSIS** - **DETERMINATION OF OPTIMUM SELLING PRICE** **--** assist in **framing products pricing policies to earn profit** - **PROFIT PLANNING** **--** estimates the **profit or loss at different levels of activity** - **EXERCISE COST CONTROL** **-- evaluates the profit and cost incurred by a firm** - **FORECASTING PROFIT** **--** analyzes the **relationship between profits, cost and volume to determine the expected income of a business [ ]** - **DECIDING AN ALTERNATIVE COURSE OF ACTION** **[-] helps in deciding the alternative courses (choices) of action for a firm** - **PLANNING FOR CASH REQUIREMENTS** **-plans for cash requirements at a given volume of output** - **NEW PRODUCT DECISIONS** **-** helps **launch a new product based on nature, output volume**, price and sale volume - **DETERMINATION OF OVERHEADS** **-** helps **determine the overhead cost charged at various activity levels** because overhead rates are generally predetermined to a selected production volume - **SETTING UP FLEXIBLE BUDGETS** \- helps set up flexible budgets, which **indicate cost at different activity levels** **BREAK EVEN ANALYSIS** - **studies the relationship between cost and revenues** - Shows **profitability or non-profitability of an undertaking at various levels of activity** - The break even **indicates the point at which sales will equal total cost** - Depict the **variable cost, fixed cost, total cost, sales value, break even point, and profit or loss at different levels of production or activities** **ASSUMPTIONS OF BREAK EVEN ANALYSIS** - **CONSTANT SELLING PRICE** \- **selling price does not change as the volume of sales changes** - **NO CHANGE IN PRODUCT** \- **sales mix remains constant if there is more than one product** - **MANAGEMENT POLICY** \- **basic managerial policies** remain unchanged - **SHORT -- TERM PRICE LEVEL** \- **general price level remains stable** at the short run level - **CONSTANT PRODUCT MIX** \- **product mix remains unchanged** - **OPERATING EFFICIENCY** \- **operating efficiency of the firm neither increases nor decreases** - **SYNCHRONIZATION BETWEEN PRODUCTION & SALES** \- **number of sales units coincides with the number of production units**, the inventory may remain constant - **PROFIT VOLUME RATIO** \- relationship between a **products contribution and selling price is represented in percentages** - **BREAK EVEN POINT IN UNITS** \- production level where total revenues equal total expenses are **represented in the number of output or units of product or service** - **BREAK EVEN POINT IN VALUES** \- where total revenues equal total expenses are **represented in terms of equivalent amount or peso value of product or service** - **COST VARIABLITY CONCEPT** \- concept of variability is valid, and the **cost are classified as fixed and variable cost** - **FIXED COSTS ARE CONSTANT** \- **fixed cost remain constant and certain factors for which the cost may not change**, whatever the activity level - **SEGREGATION OF SEMI VARIABLE COST** \- semi variable cost can be **segregated into fixed and variable** **PRICING THEORIES AND STRATEGIES** **PRICE THEORY** - Determines the value point of a good or service based on demand and supply - Aims to achieve an equilibrium wherein goods or services math=ch the market wants and the peoples purchasing power **SUPPLY** - Number of products or services the market can provide - Includes tangible goods such as the ability to make an appointment with skilled provider **DEMAND** - It applies to the markets desire to acquire a tangible or intangible item EQUILIBRIUM - Pertains to the price point that allows supply to reasonably serve the potential customers **PROSPECT THEORY** - Assumes that losses and gains are valued differently - Individuals make decisions based on perceived gains instead of perceived losses **UNDERLYING ASSUMPTIONS OF PROSPECT THEORY** **FREE OR PAID** - Negative utility is greater when a product or service is paid for /bought personally **BETTER TO PAY IN CASH** - A cash payments negative utility is greater than a cashless or credit / debit card payment - Consumers who want an overview of their expenditures tend to avoid paying with credit cards **MOON PRICES** - Rebate providers the customer with additional positive utility - Sellers are pricing product for 100 offering 25% discount DISCOUNT **PRICING STRATEGIES** **BUSINESS STRATEGIES USED TO SET PRICES OF PRODUCTS AND SERVICES** **MARKUP PRICING** - Involves assessing various cost and adding a standard percentage above total cost **COST-BASED PRICING** - Involves building a profit margin directly into the price of a product or service - Requires calculating and enumerating the cost to deliver a product or service **TARGET RETURN PRICING** - Involves setting price of a product or service at a level that will yield the target rate of return on investment **BREAK EVEN PRICING** - Involves determining the point wherein an organization would incur neither profit or loss **RATE BASED PRICING** - Involves pricing a service based on an HOURLY PRICING MODEL **PROJECT BASED PRICING** - Involves pricing a product or service based on flat fee arrangement upon the project launch **PRICING AT A PREMIUM** - Involves setting HIGHER PRICES compared to competitiors prices **PRICING FOR MARKET PENETRATION** - Involves offering relatively LOWER PRICES of goods and services **ECONOMY PRICING** - Involves minimizing the cost associated with marketing and production to keep the prices of products and services relatively low **PRICE SKIMMING** - Involves setting HIGHER PRICES TO LOWER PRICES **PSYCHOLOGY PRICING** - Involves technique marketers use to encourage customers to respond on emotional levels rather than logical one - NOT WHOLE NUMBER 299 INSTEAD OF 300 **BUNDLE PRICING** - Involves selling multiple products for a lower rate that purchasing the items individually **OPTIONAL PRODUCT PRICING** - Involves increasing the amount of customers spend once they start to buy - EXTRAS DAGDAG NA GAWA **CAPTIVE PRODUCT PRICING** - Involves charging a premium price when the consumer has no other option - BLADES AND RAZOR - PRINTER AND INK **GEOGRAPHICAL PRICING** - Involves variations in the price of a similar product or service in different parts of the world - ACCORDING TO PLACES SIMILAR PRODUCT DIFFERENT PLACES DIFFERENT PRICES **VALUE PRICING** - Involves external factors such as recession or increased competition - ISAHAN NA PRODUCT