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A Level Accounting
Marginal Costing
| Question | Answer |
|---|---|
| State the two formulas for Contribution | (1) Selling Price − Marginal Cost per Unit. (2) Fixed Costs + Profit. |
| What is the formula for Marginal Cost? | Direct Labour + Direct Materials + Variable Expenses. |
| What procedure should be followed when deciding whether to accept additional work? | 1) Calculate marginal cost. 2) Calculate contribution from new order. 3) Calculate contribution from regular production. 4) Calculate total contribution. 5) Deduct fixed costs. 6) Accept if profit increases. |
| What are the general rules for accepting additional work? | The work must make a positive contribution, there must be spare capacity, and the business should not sacrifice more profitable sales. |
| What procedure should be followed when making a make-or-buy decision? | 1) Calculate marginal cost per unit. 2) Calculate fixed costs directly attributable per unit. 3) Calculate relevant cost per unit. 4) Compare with supplier's price and choose the cheaper option. |
| When should a business buy in from an outside supplier? | When the supplier's price is lower than the relevant production cost and any lost contribution is less than the savings made. |
| How do you calculate make-or-buy when only variable costs are given? | Direct Labour + Direct Materials + Variable Expenses − Supplier Price. If positive, buying is preferable. |
| How do you calculate make-or-buy when variable and fixed costs are given? | Direct Labour + Direct Materials + Variable Expenses + Fixed Costs per Unit − Supplier Price. If positive, buying is preferable. |
| What non-financial factors should be considered in a make-or-buy decision? | Quality and reliability, price guarantees, exchange rate risks, and import restrictions. |
| What is the formula for Lost Contribution? | Manufacturing Contribution − Buying-in Contribution. |
| How is Total Lost Contribution calculated? | Lost Contribution per Unit × Number of Units. |
| When should a business buy in based on lost contribution? | If total lost contribution is less than the savings from buying in. |
| What procedure should be used for a loss-making department question? | Prepare a marginal costing statement. If a loss exists, consider closure after evaluating other factors. |
| What other factors should be considered before closing a loss-making department? | Impact on other departments, fixed costs, redundancy costs, staff morale, and supplier relationships. |
| What procedure is used for Scarce Resource questions? | 1) Calculate contribution. 2) Calculate scarce resource per unit. 3) Calculate contribution per scarce resource. 4) Rank products. 5) Allocate resources according to ranking. 6) Prepare income statement. |
| How do you calculate Contribution per Scarce Resource? | Contribution per Unit ÷ Scarce Resource per Unit. |
| What is the ranking formula used in Scarce Resource decisions? | Contribution per Unit ÷ Scarce Resource per Unit. |
| How do you calculate the Target Profit Point in Units? | (Target Profit + Fixed Costs) ÷ Contribution per Unit. |
| What is the structure of a Marginal Costing Statement? | Sales − Variable Costs = Contribution. Contribution − Fixed Costs = Profit. |
| State three drawbacks of Marginal Costing | 1) Difficult to separate fixed and variable costs. 2) Fixed costs excluded from inventory valuation. 3) Job cost comparisons become difficult. |
| How do you calculate Target Profit in £? | (Target Profit + Fixed Costs) ÷ Contribution per Unit × Selling Price. |
| State an alternative formula for Target Profit in £ | Total Contribution − Fixed Costs = Target Profit. |
| State the two Cost-Plus Pricing formulas | (1) Cost Price + Mark-up = Selling Price. (2) Cost Price × Mark-up % = Selling Price. |
| Contribution per Unit + Variable Cost per Unit equals what? | Selling Price per Unit. |
| What is Contribution? | The amount remaining after variable costs have been deducted from sales revenue. |
| Why is Contribution important? | It contributes towards covering fixed costs and generating profit. |
| What is the formula for Profit using Marginal Costing? | Contribution − Fixed Costs. |
| What is the formula for Total Contribution? | Selling Price per Unit − Variable Cost per Unit × Number of Units Sold. |
| What is a Scarce Resource? | A limited resource that restricts production, such as labour hours or materials. |
| In Scarce Resource decisions, which product should be produced first? | The product with the highest contribution per unit of scarce resource. |
| What is the purpose of a make-or-buy decision? | To determine whether producing internally or purchasing externally is more cost effective. |
| What is Cost-Plus Pricing? | A pricing method where a mark-up is added to cost to determine the selling price. |
| What is Target Profit? | The desired level of profit a business wants to achieve. |
| What is a Marginal Costing Statement used for? | To analyse contribution, fixed costs, and profit. |
| How is Contribution calculated per unit? | Selling Price per Unit − Variable Cost per Unit. |
| What costs are included in Marginal Cost? | Direct Materials, Direct Labour, and Variable Expenses. |
| What costs are excluded from Marginal Cost? | Fixed Costs. |
| Why must additional work make a positive contribution? | Because it must contribute towards fixed costs and profit. |
| Why is spare capacity important when accepting additional work? | Without spare capacity the business may lose more profitable sales. |
| What happens if Contribution exceeds Fixed Costs? | A profit is made. |
| What happens if Contribution is less than Fixed Costs? | A loss is made. |
| Which type of costs are relevant in a make-or-buy decision? | Relevant costs such as variable costs and avoidable fixed costs. |
| Give three examples of scarce resources | Labour hours, machine hours, and raw materials. |
| What is Contribution per Labour Hour? | Contribution per Unit ÷ Labour Hours per Unit. |
| What is Contribution per Kilogram of Material? | Contribution per Unit ÷ Kilograms of Material per Unit. |
| Why are non-financial factors important in make-or-buy decisions? | Because cost is not the only consideration affecting long-term business success. |
Created by:
durquhart1
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