MODULE TITLE: BUSINESS MANAGEMENT TECHNIQUES
TOPIC TITLE: COSTING TECHNIQUES
LESSON 2: MARGINAL COSTING
INTRODUCTION - The purpose of this lesson is to introduce marginal costing which is an alternative costing technique to the absorption costing method. Marginal costing can be used in break-even analysis which enables a business to calculate the level of activity at which it needs to operate if it is to survive. Further applications for marginal costing will be studied in the next lesson when the underlying principles have been understood.
YOUR AIMS - At the end of this lesson you should be able to:
- distinguish between fixed, variable and semi-variable costs
- understand how semi-variable costs are treated by the marginal costing technique
- understand the marginal costing technique and be able to calculate the contribution and the contribution ratio of a product
- apply break-even analysis to a single product and a multi-product business
- appreciate the underlying assumptions behind break-even analysis especially when applying the technique.
QUESTIONS -
1. Define semi-variable cost. Use graphs to illustrate your answer.
2. What is meant by the term 'contribution'?
3. What is the contribution per unit for the following business?
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Wallop Ltd
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£
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Sales
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150,000
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12,000 units
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Direct labor
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60,000
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Direct Materials
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36,000
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|
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Rent/Rates
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10,000
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|
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Power for Machines
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6,000
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|
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Production licence
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2,000
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4. (a) What is the contribution ratio of Wallop Ltd based on the above figures?
(b) What is the contribution if sales are:
(i) 10 000 units
(ii) 30 000 units
(iii) 14 000 units?
5. Using a break-even chart, calculate the break-even point for Wallop Ltd.
6. Based on expected sales of 12 000 units what is the margin of safety for Wallop Ltd?
7. State in which departments of a large industrial organisation a 'What if Analysis' might prove of benefit.