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Decision Making under Marginal Costing, Cost Management Video Lecture | Cost Management - B Com

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FAQs on Decision Making under Marginal Costing, Cost Management Video Lecture - Cost Management - B Com

1. What is marginal costing and how does it relate to decision making?
Ans. Marginal costing is a costing technique that focuses on the analysis of variable costs and their impact on decision making. It segregates costs into fixed and variable components, where fixed costs are not considered in decision making. Marginal costing helps in making decisions such as pricing, product mix, make or buy, and discontinuing a product based on the marginal cost of producing or selling an additional unit.
2. How does marginal costing differ from absorption costing?
Ans. Marginal costing differs from absorption costing in the treatment of fixed overhead costs. Under marginal costing, fixed overhead costs are treated as a period cost and are not allocated to individual units of production. In contrast, absorption costing allocates fixed overhead costs to units of production, including them in the cost per unit calculation. This leads to differences in profit calculation and decision making between the two costing methods.
3. What are the advantages of using marginal costing in decision making?
Ans. Some advantages of using marginal costing in decision making include: 1. Simple and easy to understand: Marginal costing focuses on variable costs, making it easier to analyze and interpret for decision making. 2. Accurate decision making: By considering only variable costs, marginal costing provides a clear picture of the incremental costs associated with different decisions, leading to more accurate decision making. 3. Helps in pricing decisions: Marginal costing helps in determining the minimum price at which a product should be sold to cover its variable costs and contribute towards fixed costs and profits. 4. Facilitates cost-volume-profit analysis: Marginal costing helps in analyzing the relationship between costs, volume, and profits, enabling businesses to make informed decisions about production levels and sales targets. 5. Simplifies break-even analysis: Marginal costing simplifies break-even analysis by focusing on the contribution margin, which is the difference between sales revenue and variable costs.
4. How does marginal costing assist in product mix decisions?
Ans. Marginal costing assists in product mix decisions by calculating the contribution margin per unit for each product. The contribution margin represents the difference between sales revenue and variable costs and indicates the amount available to cover fixed costs and contribute towards profit. By comparing the contribution margin per unit of different products, businesses can identify the most profitable product mix and allocate resources accordingly.
5. Can marginal costing be used for long-term decision making?
Ans. Marginal costing is primarily used for short-term decision making due to its focus on variable costs. Long-term decision making involves considering fixed costs, as they may change over time. However, marginal costing can still provide valuable insights in long-term decision making by analyzing the contribution margin and cost behavior patterns. It can be used as a starting point for decision making, but additional analysis and consideration of fixed costs are necessary for comprehensive long-term decision making.
48 videos|51 docs|17 tests
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