Approach to Profit Reporting

What is the key difference between marginal costing and absorption costing?

• Marginal costing includes only fixed costs, while absorption costing includes only variable costs.

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

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

• Marginal costing and absorption costing both include fixed and variable costs but allocate them differently.

In marginal costing, which cost is used to determine the contribution margin?

• Only fixed costs

• Only variable costs

• Both fixed and variable costs

• Non-production costs

Which of the following is a limitation of absorption costing?

• It simplifies the pricing process.

• It ignores fixed costs in product cost calculation.

• It may cause overstatement of profits by including fixed costs in unsold inventory.

• It focuses on short-term decision making.

Which statement is true about marginal costing?

• Fixed production costs are allocated to each unit of product.

• Variable production costs are treated as period costs.

• Fixed production costs are treated as period costs.

• All production costs are included in the cost of the product.

Under absorption costing, unsold inventory includes:

• Only variable costs

• Only fixed costs

• Both fixed and variable costs

• Neither fixed nor variable costs

What is the main advantage of using marginal costing for decision making?

• It includes all production costs in product cost calculations.

• It is better for long-term profitability analysis.

• It helps in determining the contribution margin by focusing on variable costs.

• It ensures fixed costs are allocated to each product.

Which of the following industries is more likely to benefit from using absorption costing?

• Software development

• Retail

• Manufacturing

• Marketing agencies

In an income statement prepared under marginal costing, how are fixed production costs treated?

• They are included in the cost of goods sold.

• They are allocated to each unit produced.

• They are treated as a period cost and expensed in full.

• They are deferred and included in inventory.

Which costing method is more likely to reflect higher profits when inventory levels increase?

• Marginal costing

• Absorption costing

• Both will reflect the same profits

• Neither method will reflect higher profits

What is the purpose of a reconciliation report in costing?

• To allocate fixed costs to each unit of production.

• To compare income statements prepared using both marginal and absorption costing methods.

• To determine the contribution margin for a product.

• To calculate the total production costs for a product.