Using the marginal costing method, contribution is equal to total sales revenue less ________________.
Answers
MARGINAL COSTING 14.9
2. Fixed costs are regarded as period
costs. The Profitability of different
products is judged by their P/V ra-
tio.
Fixed costs are charged to the cost of
production. Each product bears a rea-
sonable share of fixed cost and thus the
profitability of a product is influenced
by the apportionment of fixed costs.
3. Cost data presented highlight the
total contribution of each product.
Cost data are presented in conventional
pattern. Net profit of each product is
determined after subtracting fixed cost
along with their variable costs.
4. The difference in the magnitude of
opening stock and closing stock
does not affect the unit cost of pro-
duction.
The difference in the magnitude of
opening stock and closing stock affects
the unit cost of production due to the
impact of related fixed cost.
5. In case of marginal costing the cost
per unit remains the same, irrespec-
tive of the production as it is valued
at variable cost
In case of absorption costing the cost
per unit reduces, as the production in-
creases as it is fixed cost which reduces,
whereas, the variable cost remains the
same per unit.
14.5.2 Difference in profit under Marginal and Absorption costing
The above two approaches will compute the different profit because of the dif-
ference in the stock valuation. This difference is explained as follows in different
circumstances.
1. No opening and closing stock: In this case, profit / loss under absorption and
marginal costing will be equal.
2. When opening stock is equal to closing stock: In this case, profit / loss under
two approaches will be equal provided the fixed cost element in both the stocks is
same amount.
3. When closing stock is more than opening stock: In other words, when production
during a period is more than sales, then profit as per absorption approach will be
more than that by marginal approach. The reason behind this difference is that a
part of fixed overhead included in closing stock value is carried forward to next
accounting period.
4. When opening stock is more than the closing stock: In other words, when
production is less than the sales, profit shown by marginal costing will be more
than that shown by absorption costing. This is because a part of fixed cost from
the preceding period is added to the current year’s cost of goods sold in the form
of opening stock.
© The Institute of Chartered Accountants of India
Answer:
Variable Cost.
Explanation:
Marginal Costing:
It refers to an increase or decrease in the total cost of production of a product due to a change in the quantity of the desired output. It is variable, depending on the addition of resources required to produce or deliver additional units of products or services.
It can be used by the Managers of organizations to make resource allocation decisions, optimize output, streamline operations, control manufacturing costs, and plan budgets and profits.
In most cases, Variable costs influence Marginal costs. but it can be, consider fixed expenses in circumstances of increased output.
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