Marginal Costing and Cost Volume Profit Analysis: Q&A
Marginal costing is the ascertainment of marginal cost and its effect on profit of changes in volume or type of output by differentiating between fixed cost and variable cost.
1. What do you understand by marginal cost?
It is the amount by which aggregate cost is changed if the volume of output is increased or decreased by one unit at any given volume of output.
2. What do you mean by break-even point?
The break-even point is that point of sales where there is no profit and loss at this point contribution is just equal to fixed costs.
3. Explain the meaning of contribution?
When variable cost is deducted from sales the residual is termed as the contribution.
4. State factors affecting the break-even point?
The following factors will affect the break-even point:
- Increase in fixed cost.
- The decrease in fixed cost.
- Increase in variable cost.
- The decrease in variable cost.
5. Give any two applications of contribution?
- Helpful in taking the decision to accept or reject the new order.
- Determination of selling price in certain circumstances etc.
6. What is the meaning of margin of safety?
The margin of safety is the excess of actual sales over the break-even sales volume.
7. What do you understand about keeping a factory?
It is an internal or external factor that restricts production sales or profit of the concern it is also known as a limiting factor or principle budget factor.
What is the meaning of the angle of incidence in a break-even chart when the total sales line and the total cost line are drawn on the same graph paper an angle is framed at its point of intersection which is known as the angle of incidence?
8. What do you understand by cost volume profit analysis?
An increase or decrease in cost corresponding to an increase or decrease in production is analyzed expenses are classified as fixed and variable on the basis of variable expenses increase or decrease in production conventional method of cost volume profit and its changes this technique is helpful in the interpretation of cost elements and managerial decisions.
9. What is the assumption of break-even analysis?
The assumption of break-even analysis is:
- The total cost can be divided into fixed and variable costs.
- The selling price per unit is more than the variable cost per united cost remains constant up to an extent of production while the variable cost remains constant per unit of production.
- There are no changes in sales mix operating efficiency or utilization of plant and labor etc.
10. What is the Break-Even Chart?
The presentation of break-even analysis in the form of a chart or graph is termed a break-even chart.
The manager can appraise the business situation at a glance and it is easy to understand for the person not possess accounting knowledge.
Marginal cost at the different production levels, fixed cost. The volume of sales and profit or loss can be understood with this chart.
It helps in analyzing the effect of the change in one factor over other factors and re vales margin of safety.
11. What is the importance of the Margin of Safety?
It indicates the profitability and safety of any business. A comparative study is feasible between two or more business enterprises with the help of computing safety and a margin of safety.
The Margin of safety may increase on account of the following changes:
- Increase in selling price.
- the decrease in variable cost.
- the decrease in fixed costs and.
- shut down for non-profitable production and start profitable production.