L5: Marginal Costing

What is the main difference between marginal costing and absorption costing in terms of fixed production costs?

• marginal costing = fixed production costs are treated as period costs, expensed in the period incurred

• absorption costing = fixed production costs are treated as production costs and allocated to products.

What does the contribution margin represent in marginal costing?

Contribution = Sales Revenue - Variable Costs.

• It shows how much money is available to cover fixed costs and generate profit.

How is profit calculated in marginal costing?

Profit = Total Contribution - Fixed Costs.

In marginal costing, how are fixed overheads treated?

Fixed overheads are treated as period costs and deducted in full from the profit and loss statement in the period incurred.

What happens to profit under absorption costing if inventory levels increase?

Absorption costing results in a higher profit when inventory levels increase because fixed overheads in closing inventory are carried forward.

What is the breakeven point in units?

Breakeven point (units) = Fixed Costs / Contribution per Unit.

What is the margin of safety?

Margin of Safety = Budgeted Sales – Breakeven Sales

• It indicates how much sales can drop before the business reaches breakeven.

How do you calculate the contribution per unit in a breakeven analysis?

Contribution per Unit = Sales Price - Variable Costs.

In absorption costing, how is closing inventory valued?

Under absorption costing, closing inventory is valued at the full production cost, including both variable and fixed production costs.

What is the impact of a change in inventory levels on profit under absorption costing vs. marginal costing?

• Absorption costing: Profit increases if inventory increases.

• Marginal costing: Profit increases if inventory decreases.

How do you calculate the breakeven point for a single product?

Breakeven Point = Fixed Costs / Contribution per Unit.

What is the main advantage of marginal costing over absorption costing?

Marginal costing =

• simpler,

• avoids arbitrary allocation of overheads,

• and is more closely aligned with cash flow.

What is the formula for calculating the required sales volume to achieve a target profit in CVP analysis?

Sales Volume = (Required Profit + Fixed Costs) / Contribution per Unit.

What is cost-volume-profit (CVP) analysis?

CVP analysis examines how changes in fixed costs, variable costs, sales price, and sales volume affect profit.

In absorption costing, what happens when a company produces more units than it sells?

The fixed production overheads allocated to unsold units are carried forward as part of the closing inventory and are deducted from future cost of sales.

What is the formula for calculating breakeven point in sales revenue?

Breakeven Sales Revenue = Fixed Costs / Contribution to Sales Ratio

In CVP analysis, what happens to the profit when variable costs increase?

If variable costs increase, the profit decreases because the contribution per unit decreases

What is the difference in profit calculation between marginal costing and absorption costing when inventory increases?

Under absorption costing, the increase in inventory raises profits by deferring fixed overheads. In marginal costing, there is no deferral, so profit is lower

What is the primary use of CVP analysis in decision-making?

CVP analysis helps businesses understand how changes in costs, pricing, and volume affect profitability, aiding in decision-making.

What does a contribution breakeven chart show?

A contribution breakeven chart shows the variable cost line, total cost line, and sales revenue line, helping to visually identify the breakeven point and profit.