Understanding Marginal Costing

Front

What is marginal costing?

Back

Marginal costing is a costing method that includes only variable costs in product costing and treats fixed costs as period costs.

Front

How does marginal costing differ from absorption costing?

Back

Marginal costing includes only variable costs, while absorption costing includes both variable and fixed costs.

Front

What are the key components of marginal costing?

Back

Key components of marginal costing are variable costs, fixed costs, contribution margin, and decision-making impact.

Front

Explain the concept of contribution margin.

Back

The contribution margin is the difference between sales revenue and variable costs, indicating the amount available to cover fixed costs and generate profit.

Front

How is the break-even point calculated using marginal costing?

Back

Break-even Point (in units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

Front

What role does marginal costing play in decision-making?

Back

Marginal costing aids decision-making by analyzing variable costs and contribution margins to optimize profitability.

Front

What are the advantages of using marginal costing?

Back

Advantages of using marginal costing include better decision-making, simplified cost control, effective pricing strategies, and clear insights into profitability.

Front

How can marginal costing help in pricing decisions?

Back

Marginal costing aids in pricing decisions by highlighting variable costs and contribution margins, enabling informed pricing strategies.

Front

What is the impact of fixed costs on marginal costing?

Back

Fixed costs are excluded from marginal costing calculations and treated as period costs.

Front

Describe a scenario where marginal costing would be beneficial for a business.

Back

Marginal costing is beneficial for a manufacturing company facing fluctuating demand, as it helps in decision-making regarding special orders and optimizing production levels.