Test: Cost Accounting Techniques- 1 - B Com MCQ

Marginal costing is defined as the process of determining the effect of changes in volume or type of output on profit by differentiating between fixed and variable costs. It is a system in which only variable costs are charged to cost units, while fixed costs are written off against profits. This technique helps management in decision-making by providing insights into cost behavior and its impact on profitability.

One of the features of marginal costing is the separation of costs into fixed and variable elements. It computes the unit cost based on the average variable cost of manufacturing a product. It also determines profitability based on marginal contribution. However, fixed costs are not included in the value of finished goods and work-in-progress under marginal costing. They are written off against profits in the period in which they arise.

Marginal costing offers several advantages. Firstly, profit is not affected by changes in absorption of fixed expenses, which allows for better profit planning. Secondly, manufacturing cost and income statements in the direct cost form align with management's thinking. Lastly, marginal costing facilitates the relative appraisal of products, territories, and other segments of the business without the results being obscured by joint fixed costs. These advantages make marginal costing a valuable tool for cost control and decision-making.

The primary objective of variance analysis in standard costing is to compute the amount of variances and determine the causes behind them. It involves comparing actual costs with standard costs and analyzing the differences. By isolating the causes of variances, management can take appropriate corrective actions and exercise cost control. Variance analysis helps in understanding the efficiency, performance, and deviations from the established standards.

An uncontrollable variance in variance analysis is a variance caused by external factors beyond the control of individuals or departments. These factors can include changes in market conditions, fluctuations in demand and supply, or government regulations. Unlike controllable variances, which can be addressed through suitable actions, uncontrollable variances require management to adapt to the external circumstances. Identifying and understanding these variances helps in assessing the impact of external factors on costs and profitability.

A method variance in variance analysis refers to the difference between the standard cost and actual cost based on alternative methods of manufacturing a product or performing an operation. Standards usually incorporate the best method applicable, and any deviation from this method results in an unfavorable variance. It is desirable to minimize such deviations to ensure consistency and efficiency in production. By analyzing method variances, management can identify opportunities for improvement and evaluate the effectiveness of different production methods.

Equal emphasis should be placed on both favorable and unfavorable variances in variance analysis for several reasons. Firstly, favorable variances indicate efficiency and improvement in performance, while unfavorable variances highlight inefficiency and areas for corrective action. Secondly, favorable variances may be offset by unfavorable variances, affecting overall profitability. Lastly, analyzing both types of variances provides valuable insights into cost control, performance evaluation, and the effectiveness of management decisions. By understanding the causes and implications of variances, management can make informed decisions to optimize costs and improve profitability.

Classifying variances as controllable and uncontrollable in variance analysis serves the purpose of emphasizing the need for control and corrective action. Controllable variances are those that reflect the efficiency or inefficiency of individuals or departments, making them amenable to control through suitable actions. By identifying these variances, management can allocate responsibility and take corrective measures to improve performance. On the other hand, uncontrollable variances are caused by external factors beyond the control of individuals or departments. While these variances cannot be controlled directly, recognizing them helps management adapt to changing circumstances and make informed decisions. The classification of variances assists in focusing on areas where control and corrective action are most needed.

A revision variance in variance analysis refers to the difference between the standard cost and actual cost after revising the budget. It arises when a budget is revised, but the standard cost rate remains unchanged. Factors such as wage rate changes, fiscal policies, or other uncontrollable factors may affect actual costs. However, to avoid the cost and effort involved in revising the basic standard costs, the standard costs are not adjusted. Isolating the revision variance helps in analyzing other variances accurately and understanding the impact of budget revisions on cost control.

Variance analysis is important in standard costing because it encompasses multiple aspects of cost management and performance evaluation. Firstly, it helps determine the difference between actual cost and standard cost, highlighting areas of deviation. Secondly, variance analysis provides valuable insights into cost control, performance evaluation, and the effectiveness of management decisions. By analyzing variances and identifying their causes, management can take appropriate corrective actions to improve efficiency and profitability. Ultimately, variance analysis serves as a tool for continuous improvement and cost optimization in standard costing.