Marginal Costing

Marginal Costing
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Key Learning Outcomes

  • Know the equation used in all parts of the question after part (a).
  • Understand the difference between rounding an answer in units and rounding an answer in €
  • Know the theory of Marginal Costing and all other Management Accounting theory.

Introduction

Marginal Costing is one of five Management Accounting topics asked as Questions 8 and 9 in Section 3 of the accounting examination over the years as follows:

1997, 1999, 2001, 2004, 2006, 2008, 2011, 2014

The years stated above are listed solely to assist revision ‒ See Practical Matters 5.

Section 3 of the accounting examination is worth 80 marks out of a total of 400 marks (20%).

The choice in Section 3 is to answer either Question 8 or Question 9 (80 marks each).

Practical Matters:

(1)   Always do the solution in the same way ‒ this will increase speed and confidence.
(2)   Always round units up but only round euro up if the figure is ≥ 5.
(3)   Use only one colour in the solution ‒ use of colour slows down the work.
(4)   Write the solution on the left and right hand side of a double page.
(5)   Do not try to predict the examination paper ‒ study all possible questions in this section.
(6)   Know the maximum time for this question ‒ 36 minutes.

Sample Exam Q&A

Question

Mooney Ltd. produces a single product. The company’s profit and loss account for the year ended 31/12/2016 during which 70,000 units were produced and sold, was as follows:

01

The materials, direct labour and 20% of the factory overheads are variable costs. Apart from commission of 5% on sales, selling and administration expenses are fixed.

You are required to:

  1. Calculate the company’s break-even point and margin of safety.
  2. Calculate the number of units that must be sold in 2017 if the company is to increase its net profit by 10% over the 2016 figure, assuming the selling price, the cost levels and the percentages remain unchanged.
  3. Calculate the profit the company would make in 2017 if it reduced its selling price to €13, increased fixed costs by €20,000 and thereby increased the number of units sold to 90,000, with all other cost levels and percentages remaining unchanged.
  4. Calculate the selling price the company must charge per unit in 2017, if fixed costs are increased by 20% but the volume of sales and profit remain the same.
  5. Calculate the number of units that must be sold at €17 per unit to provide a profit of 15% of the sales revenue received from these same units.
  6. Outline three differences in focus between Management Accounting and Financial Accounting.

Sample Answers (a, b & c)

A

03

B

03

C

03

D

03

E

03

F

Three differences in focus between Management Accounting and Financial Accounting

  1. Management Accounting plans for the future and provides information for planning and budgeting.
    Financial Accounting records past events and provides information in the form of a profit and loss account, balance sheet and cash flow statement.
  2. Management Accounting has an internal focus and provides information to aid planning and decision making.
    Financial Accounting has both an internal and external focus and provides information to stakeholders such as managers, shareholders and creditors
  3. Management Accounting is not governed or restricted by legislation or legal requirements.Financial Accounting is governed and restricted by legislation and accounting standards e.g. Financial reporting Standards (FRS).
  4. Management Accounting prepares reports as often as managers require them. Financial Accounting normally prepares reports annually.
  5. Management Accounting prepares reports for cost-centres / departments. Financial Accounting prepares reports about the whole business.
 

Student Activity

Q1 After part (a), state the equation used in all subsequent parts of the Mooney Ltd. question above.
Q2 In a marginal costing question, state the difference between rounding an answer in units and rounding an answer in €.
Q3 List and explain the limitations / assumptions of marginal costing.
Q4 For what purpose is the Contribution Sales Ratio regularly used?
When is the use of this ratio essential?
Q5 Explain what is meant by a step fixed cost.
Q6 Outline the differences between Marginal and Absorption Costing.
Indicate which method should be used for financial accounting purposes and why.
Q7 Outline the differences in focus between Management Accounting and Financial Accounting.

Student Activity Answers

You can download/view the answers to the above questions here