MODULE TITLE: BUSINESS MANAGEMENT TECHNIQUES
TOPIC TITLE: COSTING TECHNIQUES
LESSON 3: MARGINAL COSTING APPLICATIONS AND COMPARISON WITH ABSORPTION COSTING
INTRODUCTION - The purpose of this lesson is to study the applications of marginal costing and to compare the technique to absorption costing.
YOUR AIMS - At the end of this lesson you should be able to:
- apply marginal costing to the following situations; product mix, make or buy decisions and pricing short-term contracts
- understand that a limiting factor can affect the mix and quantities of products
- understand the concept of opportunity cost
- appreciate that marginal and absorption costing produce different profit statements when stock valuation is involved
- appreciate the relative advantages of each costing technique.
QUESTIONS -
1. An upholstery company has the following costs for its product range:
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|
Wing Chair £
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Club Chair £
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Recliner Chair £
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Labour - Joiners
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20
|
40
|
35
|
|
- Fitters
|
20
|
25
|
30
|
|
Materials - Timber
|
70
|
60
|
70
|
|
- Cloth
|
50
|
60
|
70
|
|
Selling price
|
250
|
275
|
325
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|
Expected Demand (no. of chairs)
|
500
|
400
|
350
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Fixed Costs are £ 75 000
The cloth fitters are in short supply with only 5000 hours available. They are paid £5 per hour.
What is the most profitable production mix?
2. What is meant by the term opportunity cost?
3. Under what conditions might a business accept a contract at a selling price below its normal level?
4. How are stocks valued under marginal costing and absorption costing?