Marginal Costing vs Absorption Costing

These flashcards cover key concepts of marginal costing and absorption costing, focusing on definitions, comparisons, and financial implications.

What is marginal costing used for?

Marginal costing is used by management to assist in making short-term tactical decisions.

What are the two main features of marginal costing?

1. Separation of costs into fixed and variable components; 2. Calculation of contribution.

Define 'contribution' in the context of marginal costing.

Contribution is the total selling price of goods and services minus the variable costs incurred to produce them.

In acceptance of a special order, what is a key consideration for a business?

Whether accepting the special order will positively impact contribution.

Why should a department or product operating at a loss be analyzed in terms of contribution?

To determine its overall impact on the business's profitability rather than just looking at total profits.

How do marginal costing and total costing differ in handling fixed manufacturing costs?

Marginal costing treats fixed manufacturing costs as period costs, while total costing includes them as inventoriable costs.

What happens to profit calculations under marginal costing when there is closing inventory?

Closing inventory will impact profits, causing differences in profit calculations compared to total costing.

Why is total costing preferred for external reporting purposes?

Because it aligns with IAS 2 (Inventories) for accurate profit measurement through the matching of expenses and revenues.

What is the consequence of over-producing in total costing?

It allows managers to manipulate net income by increasing profits through inventory overproduction.

What does under-absorbed fixed production overheads indicate?

It indicates that the budgeted production units are greater than the actual production units.

What does over-absorbed fixed production overheads indicate?

It indicates that budgeted production units are less than actual production units.

How does marginal costing affect the valuation of inventory?

Marginal costing undervalues inventory, distorting profit figures and the financial position of the business.