2. Accounting Marginal Costing MCQ PDF PDF

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MARGINAL COSTING MARGINAL

✓ change in the total cost, due to a change of one unit of output (Usually Variable

COST

cost) ✓ variable expenses (whether of production, selling or distribution) incurred by taking a particular decision (ICA, England)

MARGINAL

✓ technique based on the differentiation between fixed cost and variable cost

COSTING:

✓ ascertains marginal cost by bifurcating total costs into fixed costs and variable costs ✓ only the variable costs are charged to production or processes, ✓ All fixed costs to be written off against profits ✓ Technique of measuring the impact ofthe change in the volume of output on the profits. ✓ basic assumption is that fixed cost will remain unchanged irrespective of the change in output ✓ The unit cost of a product is equal to its average variable cost of producing the product.

Absorption

✓ Technique of costing where all the costs (fixed + variable) are charged to production.

Costing

✓ Also known as ‘Full costing or Conventional or Traditional costing’. ✓ Profit emerges only after charging all the costs to the producti.e. fixed and variable. ✓ Stock valuation includes product costs as well as fixed production and office overheads. ✓ Stock value will tend to be higher under absorption costing than marginal Costing Difference in Absorption costing and Marginal Costing Sr. 1.

Absorption Costing

Marginal Costing

Fixed and variable costs included in product

Only Variable costs included in product

cost.

cost.

2.

Profit = sales - total cost of goods sold.

Profit = Contribution - Fixed cost.

3.

Fixed costs are included in the cost per unit.

Fixed costs are not included in cost p.u.

4.

Stock valuation includes fixed costs, i.e. higher

Stock valuation does not include fixed cost.

valuation. 5.

6.

Cost per unit reduces as the production

Cost per unit remains the same irrespective

increases, since fixed cost per unit reduces

of volume of output, as it is valued at

with high volumes.

variable cost.

The difference in the magnitude of opening

The difference in the magnitude of opening

stock and closing stock affects the unit cost of

stock and closing stock does not affect the

production due to the impact of related fixed

unit cost of production.

cost.

Fixed Costs

✓ The costs which remains fixed irrespective of the level of output are known as

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Fixed Costs. ✓ Depend on the basis of time and also known as Period costs. For e.g. insurance, rent, salaries etc. ✓ Nature of fixed costs – a) Total fixed cost remains constant irrespective of volume of output, b) Total fixed costs depend on the installed (maximum) capacity, c) Fixed cost per unit decreases when the production volume increases, Variable Costs

✓ The costs which change as per the volume of output are known as Variable Costs. ✓ Such cost is also known as Product Cost. E.g. direct wages, raw materials, variable overheads etc. ✓ Nature of variable cost a) Per unit variable cost remains the same at any given volume of output. b) Total variable cost increases with the increase in the volume of output and vice versa. c) In the short run and within the installed (maximum) capacity, marginal cost per unit will be equal to the variable cost per unit. Thus, within the installed capacity, marginal cost = variable cost = (prime cost + variable overheads)

Semi-Variable

The costs which partly remain fixed and partly variable are known as semi- variable

Cost

costs or semi-fixed costs. E.g. telephone bill, electricity expenses etc. If the cost varies after particular slabs, then such semi-variable costs are known as stepladder costs. For the purpose of marginal costing, it is necessary to divide such costs into variable component and fixed component.

Differential cost

✓ Increase or decrease in total cost resulting from any of the following a) producing or distributing a few more or few less of the products; b) a change in the method of production or of distribution; c) an addition or deletion of a product or a territory; d) selection of an additional sales channel; and e) increase in marketing costs etc.

Contribution

✓ Difference between sales value and variable (marginal) cost (Sales- Variable Cost) ✓ Serves as a measure of efficiency of operations of various segmentsof the business ✓ Contribution is also referred as Gross Margin. ✓ Contribution is considered as a fund or pool out of which all fixed costs, are recovered ✓ difference between contribution and fixed cost is either profit and loss

ADVANTAGES

✓ better and more logical basis for the fixation of selling prices

OF MARGINAL

✓ enables the management to take better and faster decisions for profit

COSTING

maximization ✓ division of fixed cost and variable cost enables a better control over the

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expenditure ✓ inventory valuation is more realistic (only variable costs are included) ✓ helps to plan the profitability of the company with Break-Even Point analysis ✓ pricing based on variable cost helps in preparing tenders for new contracts ✓ no need for allocation, apportionment and absorption of fixed overheads, thereby avoids accounting complications LIMITATIONS

✓ difficulty is in dividing total costs into fixed and variable

OF MARGINAL

✓ difficult to adopt this technique in capital intensive industries, where fixed costs

COSTING

are very large ✓ assumption that fixed costs remain constant in short-term may be always true ✓ Selling prices cannot be reasonably fixed on the basis of contribution alone

IMPORTANCE /

Relative profitability

Marginal costing facilitates the study of relative

APPLICATION

profitability of different products. It will show where

OF MARGINAL

the sales efforts should be concentrated.

COSTING Basis for pricing / tendering quotation

✓ More logical basis for fixation of selling prices and tendering for contracts and for export orders ✓ Marginal costing helps to ascertain the lowest selling price per unit which can be quoted without incurring any loss

Profit Planning

✓ Facilitates future planning of operations to attain a certain level of profits or to maintain the current levels. ✓ The contribution ratio indicates the relative profitability of a product w.r.t. to changes in SP, variable cost or product mix.

Planning Level of Activity

✓ Increase or decrease in production levels has to be arranged before actual manufacture takes place. ✓ Management would like to have an idea of the contribution and profitability at different levels of capacity utilization and marginal costing proves very useful in this regard. ✓ It is also termed as Flexible Budgeting.

Evaluation of Performance

✓ Every department / division / product line have separate earnings capacities. ✓ Comparison and better evaluation of such divisions is possible based on cost-volume-profit analysis and contribution approach.

✓ It will facilitate better decision making in cases of

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whether to discontinue the product / division or continue production. Consistency

✓ In the short-run, the marginal cost per unit of output remains same irrespective of the level of output, thus facilitating better decision making

Make or Buy decisions

✓ Marginal costing facilitates decision making in problems such as whether to manufacture components in-house or to purchase from the market. ✓ If variable cost per unit is lower than outside purchase cost, make the product else purchase. ✓ Absorption costing technique would give misleading results in such cases and hence marginal costing is applied.

Realistic Valuation of

FG& WIP stocks are valued at their variable cost

Stock

only. Therefore, it is more realistic and uniform. No fictitious profit arises.

Maintain Desired Level of Profit

✓ External and internal constraints may reduce the level of profits. ✓ Marginal costing provides information about steps to be taken to either maintain the same level of profits or to achieve a desired level of profits.

Facilitates cost control

Better means of controlling the costs by separating the fixed and variable costs

Key Factor Problems

✓ Key factors are those constraints (restrictions) which limit the operations of a business. ✓ For example, shortage of raw material, shortage of labour hours, inadequate machine capacity, less demand for a product etc. Key factor is also known as ‘limiting factor, scarce factor, principle budget factor or governing factor’. ✓ In such cases, decisions are taken on the basis of highest contribution per unit of key factor. Thereafter, the product mix is decided according to the best contribution per unit of key factor.

Deciding the Product Mix

✓ In a multi-product organization, marginal costing facilitates deciding the best product mix or sales mix to maximize the profits of the company, as a whole. ✓ The product mix is decided on the basis of contribution earned by each product. Use of Key factory is vital in deciding the optimal product mix.

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COST-VOLUMEPROFIT (CVP) ANALYSIS

✓ CVP indicates the relationship between profits and costs and the volume of production. ✓ Helps in better profit forecasting ✓ Facilitates preparing flexible budgets to indicate costs at various levels of activity ✓ Assists in formulating pricing policiesby projecting the effect which different price structures have on costs and profits ✓ Helps in forecasting costs and profits as a result of change in volume. ✓ Helps fixing a sales volume level to earn a certain level of profits, return on capital employed, or rate of dividend etc. ✓ Helps in determining relative profitability of each product, line, and project or profit plan ✓ Inter-firm comparison of profitability can be done intelligently

PROFIT

✓ Ratio of Contribution to Sales and is usually expresses as a percentage

VOLUME (P/V)

✓ Also called as margin ratio

RATIO

✓ higher the P/V ratio, higher the profitability of a product or service ✓ Depends on the selling price per unit and marginal (variable) cost per unit. ✓ P/V ratio can be improved by the either increasing the selling price per unit or reducing the variable cost per unit

BREAK-EVEN

✓ That level of production and sales, where there is neither profit nor loss

POINT

✓ The total sales revenue is equal to and total cost or contribution equals fixed cost

(BEP)

ANALYSIS

✓ may be expressed in number of units or sales amount or even as a percentage capacity.

BREAKEVEN

A breakeven chart records costs and revenues on the vertical axis and the level of

CHART

activity on the horizontal axis. The breakeven point is that point where the sales revenue line intersects the total cost line. Other measures like the margin of safety and profit can also be measured from the chart

LIMITATIONS

✓ Total fixed costs do not always remain constant.

OF BREAK-

✓ Variable costs do not always vary proportionately with production volume & cost

EVEN ANALYSIS

per unit may change.

COMPOSITE

A business undertaking may have different manufacturing establishments each

BREAK EVEN

having its own production capacity, and fixed costs but producing the same product.

POINT

At the same time, the concern as a whole is a unit having different establishments under the same management. Hence, combined fixed costs have to be met by combined BEP. In this analysis, there are two approaches mainly

Constant product mix

The ratio in which the products of the various

approach

establishments are mixed is constant. The mix will be maintained at BEP Sales

Variable product mix

Under

this

approach

the

product

of

approach

establishment would be preferred where the

that

contribution ratio is higher.

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MARGIN OF

✓ is difference between Actual Sales and Sales at Break-Even Point

SAFETY

✓ At any level of margin of safety, the additional fixed costs are zero since fixed costs are already recovered upto Break Even Point ✓ high margin of safety shows the strength and sustaining capacity of a product ✓ It is a sign of prosperity ✓ If the margin of safety of an enterprise is high, a reduction in selling price per unit or rise in variable cost per unit may not convert the profits into losses. Improvement in Margin of Safety:through the following actions – a) Increase in the selling prices, provided the demand is inelastic b) Reduction in fixed expenses. c) Reduction in variable expenses. d) Increasing the sales volume provided capacity is available. e) Substitution or introduction of a product mix such that more profitable lines are introduced

EQUATIONS OF MARGINAL COSTING Sr.

Concept

Equation / Formulae

1.

Profit

Profit = Sales (-) Total Cost Profit = Sales (-) Variable Cost (-) Fixed Cost Profit = Contribution (-) Fixed Cost Profit = (Sales x P/V ratio) – Fixed Cost Profit = Margin of Safety (x) P/V ratio

2.

Loss

Loss = Total Cost (-) Sales Loss = Fixed Cost (-) Contribution

3.

Contribution

Contribution = Sales (-) Variable Cost Contribution = Fixed Cost (+) Profit Contribution = Sales x P/V Ratio Contribution per unit = Fixed Cost BEP (units)

4.

Sales

Sales = Total Cost (+) Profit

Sales = Contribution P/V Ratio Sales = Contribution (+) Variable Cost

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5.

Profit Volume Ratio

P/V Ratio = Contribution (x) 100

(P/V)

Sales P/V Ratio = Contribution per unit (x) 100 Selling price per unit P/V Ratio = Fixed Cost (+) Profit (x) 100 Sales P/V Ratio = Difference in Contribution (x) 100 Difference in Sales P/V Ratio = Difference in Profit (x) 100 Difference in Sales P/V Ratio = Fixed Costs (x) 100 BEP (Sales) P/V Ratio =

Profit

(x) 100

Margin of Safety

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6.

Break-Even Point

BEP (units) = Fixed Cost Contribution Per unit BEP (units) = BEP (Sales) Selling price per unit BEP (Sales) = Fixed Cost P/V Ratio BEP (Sales) = BEP (units) x Selling price per unit

7.

Margin of Safety

Margin of Safety = Actual Sales (-) BEP (Sales) Margin of Safety = Profit P/V Ratio Margin of Safety (%) = Actual Sales (-) BEP (Sales) x 100 Actual Sales Margin of Safety (%) = Margin of Safety x 100 Actual Sales

8.

Fixed Cost

Fixed Cost = Total Cost (-) Variable Cost Fixed Cost = Contribution (-) Profit Fixed Cost = BEP (Sales) x P/V Ratio Fixed Cost = BEP (units) x Contribution per unit

9.

Profit for a desired

Profit = Sales (x) P/V Ratio (-) Fixed Cost

level of Sales

10.

Sales units required

Sales (units) = Fixed Cost + Desired Profit

for desired profit

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Contribution Per unit

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CHAPTER 5 1.

a.

MARGINAL COSTING

Cost – Volume – Profit analysis is most

When a factory operates at full capacity,

important for determination of

fixed costs also become relevant for make or

Volume of operations necessary to break

buy decisions. This statement is

even b.

6.

a.

Variable revenues necessary to equal fixed

True

b. False

costs c.

Relationship

between

7.

revenues and costs at various levels of operations d.

2.

Sales volume necessary to equal fixed costs

When there is no , the profit figures revealed

Product

cost

under

marginal

costing

includes a.

Prime cost only

b.

Prime cost and fixed overheads

c.

Prime cost and variable overheads

d.

Material cost and variable overheads

8.

The costing technique in which fixed factory

under marginal costing and absorption costing are identical. a.

Inventories

overheads are added to the inventory is

b. Credit sales

a.

Direct costing

c.

b.

Marginal costing

Cash sales

d. None of the above

3.

c. Absorption costing d.

Standard costing

9.

When margin of safety is 20% and P/V ratio

When sales increase from Rs. 40,000 to Rs. 60,000 and profit increases by Rs. 5,000, the P/V ratio is

is 60%, the profit will be

a.

20%

a.

30%

b.

25%

b.

33.33%

c.

30%

c.

12%

d.

40%

d.

None of the above

4.

A company having margin of safety of Rs.

10. Break-even point

400,000 makes a profit of Rs. 80,000. Its fixed cost is Rs. 500,000. Its break -even point would be

increases a. b.

Increases Decreases

a.

Rs. 20 Lakh

c.

Does not change at all

b.

Rs. 30 Lakh

d.

None of the above

c. d.

when selling price

Rs. 25 Lakh Rs. 40 Lakh

11. Direct costing and marginal costing is one and the same because

5.

Marginal costing is that technique of costing

a.

which divides cost into fixed and variable, and thereby ignores semi-variable costs.

a. b.

Both consider only variable costs as product costs

b.

In both techniques, Fixed costs are treated as

This statement is

period costs and written off in the period in

True

which they arise

False

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