Marginal Costing Flashcards
Advantages of MC
1) There is no over/under absorption to calculate.
2) Contribution is constant and stays the same as sales volume changes whereas profit per unit varies with changing sales volume.
3) Fixed costs are period costs and are deducted in full after the contribution is calculated.
4) It is easier to calculate and is useful for decision-making.
What is the purpose of marginal costing?
Its purpose is to determine the variable cost of one unit.
What is the difference between marginal costing and absorption costing?
The MC technique considers variable costs as the actual production cost while AC considers both variable and fixed cost as a part of production cost.
Other differences between MC and AC
MC considers whether the costs are variable production or fixed production overheads while AC is more concerned with whether costs are production or non-production.
Assumption for MC
Fixed costs do NOT change in the short term and profits are affected by changes in sales volume.
How are fixed costs dealt with in MC?
They are deducted from the total contribution.
Uses of Marginal Costing
1) Short term decision making
2) Make or Buy Decisions
3) One-off contracts
4) Limiting factor analysis (Limited labor or raw materials in the short term leads to new decisions that need to be made.)
All use contributions to make decisions
What is absorption costing?
It traces all manufacturing costs to products and treats non-manufacturing overheads as a period cost.
What is marginal costing?
Traces all variable costs to products and treats fixed manufacturing/non-manufacturing overheads as period costs.
Profit statement for marginal costing
Revenue
- VC (Production/manufacturing)
- VC (Non-production)
= Contribution
Contribution
- Actual FC (Production)
- Actual FC (Non-production)
= Profit
