9706 · 2.2.3
Marginal costing flashcards
Revision flashcards for Cambridge 9706 Marginal costing (syllabus 2.2.3). Flip, recall, then mark a real past-paper question.
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Contribution?
Sales revenue − Variable costs (per unit or total).
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Fixed costs in marginal costing?
Whole amount charged to period — not in inventory value.
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Profit reconciliation?
Absorption profit ± (Opening − Closing inventory) × fixed OAR per unit.
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When inventory rises?
Absorption profit > marginal (fixed OH deferred in inventory).
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Decision relevance?
Marginal costing better for short-term pricing/accept orders.
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Variable production cost?
Direct materials + direct labour + variable production overhead.
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What is 'contribution'?
The amount remaining from sales revenue after all variable costs have been deducted. It contributes towards covering fixed costs and then generating profit. Formula: Sales Revenue - Variable Costs.
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How are fixed production overheads treated in marginal costing?
They are treated as 'period costs'. This means they are written off in full against the contribution for the period in which they are incurred, regardless of production or sales levels.
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How is closing inventory valued under marginal costing?
Closing inventory is valued at its marginal (variable) production cost only. It does not include any share of fixed production overheads.
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What is the primary difference in the profit statement layout between marginal and absorption costing?
A marginal costing statement calculates 'contribution' (Sales - Variable Costs) before deducting fixed costs. An absorption costing statement calculates 'gross profit' (Sales - Cost of Goods Sold, which includes fixed overheads).
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When will marginal costing profit be higher than absorption costing profit?
When sales volume is greater than production volume. This causes inventory levels to decrease, releasing fixed costs deferred in opening inventory (under absorption costing) into the income statement, thus lowering the absorption profit.