Week 3 - Marginal Costing Flashcards
(24 cards)
What is variable (marginal) costing?
An alternative to full costing in internal management reporting.
Why is variable costing often preferred by management accountants?
For decision making and performance evaluation.
Under variable costing, how are fixed manufacturing costs treated?
Excluded from inventoriable costs and charged directly to the Income Statement as period costs.
What costs are included in the costing of inventory under variable costing?
Only variable manufacturing costs.
How are opening and closing inventory valued under marginal costing?
At marginal (variable) cost.
What is the argument in support of marginal costing regarding cost behavior?
Most costs are variable in the very long run and vary with management’s controllable measures.
What does marginal cost consist of?
The aggregate of variable costs, i.e., prime cost + variable overhead (manufacturing and non-manufacturing).
How are variable manufacturing costs treated in financial statements?
Inventoried in the SOFP and charged as an expense to the income statement as COS.
How are fixed manufacturing costs treated in financial statements?
Expensed as a charge to the income statement as period costs.
What does the income statement look like under marginal costing?
Sales less COS, less other variable costs, contribution, less fixed costs, profit/loss.
What is included in full (absorption) costing?
All manufacturing costs, either variable or fixed, are included as inventoriable costs.
What is the choice of costing method influenced by?
Managerial choice and specific scenarios like government subsidies or managerial commissions.
What are actual overhead absorption rates?
Rates not available before the end of the period.
What are budgeted overhead absorption rates?
Estimated before the start of the period and used in planning and budgeting.
What does the Production Volume Variance (PVV) explain in absorption costing?
Whether actual production is above or below the predicted/budgeted volume.
What happens if the budgeted period volume is greater than the actual volume?
Too little fixed production cost would be absorbed, resulting in an adverse variance. PVV is Unfavourable. It is therefore subtracted from Gross profit at standard to give a lower actual gross profit
What happens if the actual period volume is greater than the budgeted volume?
Too much fixed cost would have been absorbed, resulting in a favorable variance. PVV is Favourable. It is added to the Gross profit at standard to give a higher Actual gross profit
What is one undesirable effect of full costing?
Encourages operational inefficiencies by increasing production without customer demand.
What can alleviate the undesirable effects of full costing?
Changing internal accounting systems, performance evaluation methods, and adopting technology.
Does the method chosen for costing matter?
Yes, IAS2 does not allow marginal costing for external reporting purposes.
What is a limitation of marginal costing?
Difficulty in classifying expenses into fixed and variable categories.
What risk do sales staff face when using marginal costing?
Mistaking marginal cost for total cost and selling at low prices, resulting in losses.
True or False: In the long run, total reported profit will be the same regardless of the costing method used.
True.
Fill in the blank: Marginal costing has a strong case because in the long run, all costs are _______.
[variable].
