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Marginal Costing (Basics) – Warm up Excercise
Are you not sure where and when Marginal Costing is applicable or what is the difference between Marginal costing and Absorption costing or what is Contribution Margin? This article has answers for all your questions and doubts. If you have any further questions, just add to the forum and our experts will try to answer them for you.
Table of Contents [hide]
- Q: Are there any situations where marginal costing is more appropirate?
- Q: The following are claimed to be advantages of marginal costing over absorption costing.
- Q: Is contribution margin the same as operating income?
- Q: “Contribution margin is defined as sales (or revenues) minus variable expenses.” Is this statement True or False?
- Q: “The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.” Is this statement True or False?
Before going into the exercise, why not take this as an interactive quiz?
Q: Are there any situations where marginal costing is more appropirate?
Answer:
Marginal costing may be more appropriate:
- Where stock building is to be discouraged
(When stocks rise, absorption costing tends to boost reported profits encouraging managers to stock build)
- For short-run pricing decisions
(Any selling price that covers the marginal cost leads to an increase in contribution and hence profit)
Q: The following are claimed to be advantages of marginal costing over absorption costing.
- Marginal costing avoids arbitrary sharing of costs.
- Marginal costing is better for short-term decision-making.
- Marginal costing avoids profit distortions due to stock fluctuations.
Which of these claims are substantially true?
a. (1) and (2) only
b. (2) and (3) only
c. (1) and (3) only
d. All of them
Answer:
The answer is d. All of these are true.
Reason:
- Absorption costing has to share fixed costs in an arbitrary manner.
- Selling prices need to exceed only variable costs in the short term.
- Absorption costing causes profit distortions with stock fluctuations.
Q: Is contribution margin the same as operating income?
Answer:
Contribution margin is different from operating income.
Contribution margin is the difference between the sales and the marginal cost of sales and it contributes towards fixed expenses and profit.
Contribution = Selling Price - Marginal Cost
Operating income is the net income before the non operating items such as interest revenue, interest expense, gain or loss on the sale of plant assets, etc.
Q: “Contribution margin is defined as sales (or revenues) minus variable expenses.” Is this statement True or False?
Answer:
True
Q: “The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.” Is this statement True or False?
Answer:
False
Reason:
The contribution margin per unit is the selling price per unit minus the variable expenses per unit.
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