Topic 4 - Marginal costing

Question 1

Break-even

Answer 1

The level output where total revenue exactly equals total cost

Question 2

Margin of safety

Answer 2

Difference between actual output and break-even output

Question 3

Contribution

Answer 3

The amount left from revenue after all variable costs have been deducted. This amount contributes to fixed costs and then to profit once all the fixed costs are covered

Question 4

Using the CS Ratio

Answer 4

CS Ratio = Total contribution/sales

Breakeven Revenue = Total fixed cost/CS Ratio

Question 5

When is CS Ratio useful

Answer 5

Multiple products are sold

A marginal costing statement is available

Question 6

Breakeven formuls

Answer 6

Fixed costs/ (Selling price - Variable price)

Question 7

Why should One-Off orders be accepted if the business is making a loss on them

Answer 7

If the order has positive contribution because it means that normal production has a smaller share of fixed costs allocated to it. This reduces unit cost as fixed costs are spread over a higher output

Question 8

Why shouldn’t One-Off orders be accepted

Answer 8

There must be spare capacity
must be one-off otherwise customer will expect the same price all the time
Clear separation between one-off customers and normal customers
The customer shouldn’t be able to undercut the original business
If the competitors find out it might start a price war

Question 9

Marginal costing statement

Answer 9

Revenue
- Total VC
= Contribution
- Less FC
= Profit

Question 10

Calculating contribution in terms of limiting factor

Answer 10

Selling price
VC per unit
Contribution per unit
Limiting factor per unit (divide)
Contribution per unit of limiting factor

Question 11

Optimum production plan

Answer 11

Limiting factor XX

PP:
P                     X   (X)
S                     X   (X) 
Q                    X   (X)
                             0

Question 12

Liquid funds

Answer 12

Accessible funds in cash and cash equivalents

Question 13

Marginal costing

Answer 13

A costing technique that focuses on variable costs and contribution to fixed costs and profits. It is primarily used for short-term decision making

Question 14

Advantages

Answer 14

Easily understood and applied in decision making

Focuses on short-term profit maximisation through contribution to overall fixed costs

Question 15

Disadvantages

Answer 15

Fixed costs are treated as time related costs and are not related to specific cost units - Not useful for long- term decision making
Many factors need to be considered beyond the calculation