3.1 Marginal and Absorption Costing

• What type of costs are included in marginal costing?

  Direct costs
• Marginal costing treats period costs as expenses
• How are fixed costs treated in marginal costing?

  As period expenses
• The contribution margin in marginal costing is calculated as Sales Revenue minus Direct Costs.
• The break-even point in marginal costing is calculated as Fixed Costs divided by the Contribution Margin Ratio
• What type of costs are included in absorption costing?

  Direct and indirect costs
• Absorption costing is primarily used for financial reporting and inventory valuation.
• How are fixed costs treated in absorption costing?

  Included in product cost
• In absorption costing, the total product cost is calculated as Direct Costs plus Indirect Costs
• For what type of decision-making is marginal costing most useful?

  Short-term decision-making
• Steps to prepare a marginal costing income statement

  1️⃣ Calculate contribution margin

  2️⃣ Deduct fixed costs

  3️⃣ Determine net profit
• The formula for calculating the contribution margin is Sales Revenue minus Direct Costs
• The break-even point in marginal costing is calculated by dividing fixed costs by the contribution margin ratio.
• How does marginal costing treat fixed costs in profitability calculations?

  As period expenses
• Why is absorption costing primarily used for financial reporting?

  To meet accounting standards
• In absorption costing, fixed costs are included in the product cost
• Profitability in absorption costing is based on gross profit rather than contribution margin.
• What type of costs are included in marginal costing?

  Direct costs
• Period costs in marginal costing are expensed in the period they occur
• Marginal costing is useful for short-term decision making.
• What are examples of direct costs in marginal costing?

  Direct materials, labor, expenses
• Period costs in marginal costing include expenses like rent and administrative salaries
• Arrange the uses of marginal costing in order of relevance:

  1️⃣ Pricing strategies

  2️⃣ Production planning

  3️⃣ Break-even analysis
• What is the purpose of using marginal costing for pricing strategies?

  Determining selling price
• Break-even analysis is one of the uses of marginal costing.
• Which costing method includes both direct and indirect costs in the product cost?

  Absorption costing
• In marginal costing, fixed costs are treated as expenses
• Profitability in marginal costing is based on the contribution margin.
• What is the formula for calculating contribution margin in marginal costing?

  $CM =$$Sales Revenue - Direct Costs$
• The break-even point in marginal costing is calculated as fixed costs divided by the contribution margin ratio
• What is the key difference between absorption costing and marginal costing in terms of costs included?

  Direct and indirect vs direct only
• Profitability under absorption costing is based on gross profit.
• What is the formula for calculating total product cost under absorption costing?

  $Total Product Cost =$$Direct Costs +$$Indirect Costs$
• Under marginal costing, fixed overhead costs are treated as period expenses
• What is the formula for calculating total cost under marginal costing?

  $Total Cost =$$Direct Materials +$$Direct Labor +$$Direct Expenses$
• What does absorption costing allocate to each unit produced?

  Manufacturing overhead costs
• Fixed overhead costs are treated as period expenses under marginal costing
• The marginal costing formula only includes direct costs.
• In marginal costing, fixed overhead is excluded and treated as a period expense
• Absorption costing includes both direct and indirect costs in the total cost of a product.