Marginal Costing Part I Quiz Questions

Absorption costing is a basic cost accounting method where fixed factory overhead is added to inventory. This means that all costs, both fixed and variable, are allocated to the products being manufactured. This method is used to determine the full cost of producing a product, including both direct costs (such as direct materials and direct labor) and indirect costs (such as factory overhead). Absorption costing is commonly used for financial reporting purposes as it provides a more accurate representation of the total cost of production and helps in determining the selling price of the product.

An increase in fixed costs will result in an increase in the break-even point sales level. This is because fixed costs are expenses that do not change regardless of the level of sales. Therefore, as fixed costs increase, a business will need to sell more units or generate more revenue in order to cover those costs and reach the break-even point. This means that the break-even point sales level, which is the point at which total revenue equals total costs, will increase.

The correct answer is "Prime costs and variable factory overheads." Direct costing, also known as variable costing, only includes the costs that vary with the level of production, such as direct materials and direct labor (prime costs), as well as variable factory overheads. Fixed factory overheads are not included in direct costing as they are considered period costs and are not directly tied to the production level. Therefore, the correct answer is prime costs and variable factory overheads.

An increase of Rs.1000 in fixed selling overheads will affect the net profit equally in both absorption and marginal costing. This is because both absorption costing and marginal costing allocate fixed overhead costs to the cost of production. Therefore, an increase in fixed selling overheads will lead to a decrease in net profit in both methods.

The weighted average method of stock valuation takes into account both the opening stock and the units produced during the period. It calculates the average unit cost by dividing the total cost of the opening stock and the units produced by the total number of units. In this case, the opening stock of 50 units valued at Rs.10 each and the 500 units produced at an average unit cost of Rs.8.90 are considered. The weighted average method results in a closing stock value of Rs.9 per unit.

When the selling price is reduced by 10%, the new selling price per unit would be 90% of the original selling price. The new selling price per unit can be calculated as 90% of Rs. 1,00,000, which is Rs. 90,000.

To calculate the break-even sales quantity, we need to find the point where total revenue equals total costs. The total costs consist of both fixed costs and variable costs.

The fixed costs remain the same at Rs. 24,000. The variable costs per unit can be calculated as Rs. 60,000 divided by the original sales quantity of 500 units, which is Rs. 120 per unit.

To find the break-even sales quantity, we can divide the fixed costs by the difference between the selling price per unit and the variable cost per unit.

Break-even sales quantity = Fixed costs / (Selling price per unit - Variable cost per unit)
Break-even sales quantity = Rs. 24,000 / (Rs. 90,000 - Rs. 120)
Break-even sales quantity ≈ 400 units

Therefore, the break-even sales quantity is approximately 400 units.

If units produced exceed units sold, it means that there is an increase in inventory. In the absorption costing method, fixed manufacturing costs are allocated to units produced and are included in the cost of inventory. Therefore, when units produced exceed units sold, a larger portion of fixed costs is allocated to inventory, resulting in higher income computed by the absorption costing method. On the other hand, the direct costing method only considers variable manufacturing costs as part of the cost of inventory, so it does not account for the allocation of fixed costs. Hence, income computed by the direct costing method will not be affected by the difference in units produced and units sold.

SSAP 9 recommends including a share of all production overheads for finished goods stock valuation. This means that the cost of producing the goods should not only include the direct materials and direct labor, but also a portion of the overhead costs incurred in the production process. By including all production overheads, the valuation of finished goods will be more accurate and reflective of the true cost of production.

The contribution: sales ratio (CS ratio) is calculated by dividing the contribution (profit) by the sales. In this case, the CS ratio is 0.45 (contribution of 0.45 for every 1 unit of sales). When 20 units of B are substituted for 20 units of A, the total sales units remain the same. However, since the CS ratio for B is higher than that of A (0.40 > 0.50), the overall CS ratio will increase. The increase will be by a small amount because only 20 units are being substituted. Therefore, the correct answer is that the CS ratio rises from 0.45 to 0.46.

Full or absorption costing is the term that means that all manufacturing costs, whether direct or indirect, variable or fixed, are traced to the output and inventories. This method includes all costs associated with the production process, regardless of whether they vary with the level of production or not. It ensures that all costs are accounted for and allocated to the products being produced, providing a comprehensive view of the total cost of production.

Variable costing is a more descriptive term for the type of cost accounting often called direct costing because it focuses on the variable costs, which are costs that change in direct proportion to the level of production or sales. Variable costing excludes fixed costs, such as rent and salaries, as they are not directly related to the production volume. This method is useful for decision-making and understanding the cost behavior of a business. Out of pocket costing refers to the actual cash payments made for costs, relevant costing is a broader concept that considers all costs relevant to a particular decision, and prime costing is a method that includes only direct materials and direct labor costs.

The correct answer is to include expenditure incurred in bringing the stock of its present location and condition. This means that the valuation of work-in-progress should include any costs that were incurred to bring the stock to its current state, such as transportation costs, storage costs, and any other expenses directly related to the production process. This is in line with the recommendations of SSAP 9, which provides guidelines for the valuation of work-in-progress. Including these expenditures ensures that the valuation reflects the true cost of producing the goods and provides a more accurate representation of the value of the work-in-progress.

Adherents of marginal costing argue that it enables the profit statement to focus on the contribution earned from sales. This is because marginal costing only considers variable costs, such as direct materials and direct labor, in the valuation of stock. By excluding fixed production overheads and non-production costs, the profit statement can accurately reflect the contribution margin, which is the difference between sales revenue and variable costs. This allows management to analyze the profitability of products or services more effectively and make informed decisions regarding pricing, cost control, and resource allocation.

Under the direct costing concept, only direct costs are included in the income statement. This means that only costs that can be directly attributed to the production of goods or services are considered. The work in process inventory account is eliminated because it includes costs that are not directly related to production. Variable costs, which change in relation to the level of production, are matched against revenues to determine the profit or loss for a specific period. Fixed costs, on the other hand, are treated as period costs and are not directly matched against revenues.

When sales and production are the same quantity, the profit reported under marginal costing will be the same as that under absorption costing. Marginal costing only considers variable costs in determining the cost of production, while absorption costing includes both variable and fixed costs. However, when sales and production are equal, there is no difference in the treatment of fixed costs between the two costing methods. Therefore, the profit reported will be the same under both methods.

The difference in production margin reported for June under absorption costing compared to that under marginal costing is Rs.225 higher. Absorption costing includes fixed production overheads in the cost of each unit produced, while marginal costing only includes variable costs. Since the fixed production overhead for June is Rs.900 and 600 units were produced, the fixed production overhead per unit is Rs.1.50. Therefore, under absorption costing, the production margin would be lower by Rs.1.50 per unit compared to marginal costing. As 450 units were sold, the total difference in production margin would be Rs.225 (Rs.1.50 x 450 units).

Absorption costing and direct costing differ in terms of the amount of fixed cost that will be incurred. Absorption costing includes all manufacturing costs, both variable and fixed, in the cost of a product. This means that fixed costs are allocated to each unit of product. On the other hand, direct costing only includes variable manufacturing costs in the cost of a product and does not allocate any fixed costs to the units. Therefore, the amount of fixed cost that will be incurred is a key difference between absorption costing and direct costing.

The total production cost for making 20,000 and Rs.21,000 is not given, but the total production cost for making 50,000 units is given as Rs.34,000. This means that the cost per unit for making 50,000 units is Rs.34,000/50,000 = Rs.0.68. Since there is an additional fixed cost of Rs.4,000 once production exceeds 25,000 units, the cost per unit for making 30,000 units would be (Rs.34,000 + Rs.4,000)/30,000 = Rs.0.93. Therefore, the correct answer is Rs.0.93.

When sales units remain constant each month but production units fluctuate, using marginal cost stock valuation will result in the same profit being reported each month. This is because under marginal cost valuation, the cost of goods sold is calculated based on the actual cost of producing each unit during that specific month. As a result, the profit reported will be consistent regardless of the fluctuation in production units.

Under absorption costing, fixed manufacturing costs are allocated to each unit of production and included in the inventory cost. This means that the quantity of all units in inventory multiplied by the relevant fixed cost per unit will give the difference between net profit under absorption costing and net profit under direct costing. This is because direct costing only includes variable manufacturing costs in the inventory cost, resulting in a lower net profit compared to absorption costing.