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Cost Accounting

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In: Cost Accounting

Define Coefficient Of Determination?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on June 28, 2021 at 10:31 pm

    The coefficient of determination is a statistical measurement that investigates how variations in one variable may be explained by changes in another one. For example, when a person gets pregnant has a direct relation to when they give birth. In statistics, the coefficient of determination denoted bRead more

    The coefficient of determination is a statistical measurement that investigates how variations in one variable may be explained by changes in another one.

    For example, when a person gets pregnant has a direct relation to when they give birth.

    In statistics, the coefficient of determination denoted by R2 or r2 and pronounced “R squared”.

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In: Cost Accounting

Define Production Volume Variance?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on June 28, 2021 at 6:50 pm

    Production volume variance is a statistic used by organizations to compare the cost of manufacturing items to the budgeted expectations. It compares the actual overhead costs per unit to the predicted or budgeted overhead expenses per item. It shows the difference between :  The company's budgeted aRead more

    Production volume variance is a statistic used by organizations to compare the cost of manufacturing items to the budgeted expectations. It compares the actual overhead costs per unit to the predicted or budgeted overhead expenses per item.
    It shows the difference between :

    1.  The company’s budgeted amount of fixed manufacturing overhead costs.
    2. The amount of the fixed manufacturing overhead costs that were assigned to (or absorbed by) the company’s production output.
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In: Cost Accounting

How do you define the term Standard costing ?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 5:08 pm

    Standard costing is a costing approach that compares standard expenses and revenues to real outcomes in order to identify variations and their causes, alert management of the deviations, and take corrective action to improve the situation. J. R. Brown and L. R. Howard defines standard costing “as aRead more

    Standard costing is a costing approach that compares standard expenses and revenues to real outcomes in order to identify variations and their causes, alert management of the deviations, and take corrective action to improve the situation.

    J. R. Brown and L. R. Howard defines standard costing “as a technique of cost accounting which compares the ‘standard cost’ of each product or service with the actual cost, to determine the efficiency of the operation, so that any remedial action may be taken”.

    I.C.M.A., London, has defined the term ‘Standard Costing’ as “the preparation of standard costs of products and services”.

    Thus, standard costing involves:

    The setting of standards

    Ascertainment of actual results

    Comparing standards with actual costs to determine the variance

    Investigating the discrepancies and taking the necessary steps

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In: Cost Accounting

Explain the difference between Marginal Costing and Absorption Costing ?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 5:01 pm

    Marginal costing and absorption costing are two cost management approaches that are used to assign costs to items in order to value them. Fixed expenses are considered as period costs and removed as an expense immediately from the amount of contribution made, whereas variable costs are allocated toRead more

    Marginal costing and absorption costing are two cost management approaches that are used to assign costs to items in order to value them. Fixed expenses are considered as period costs and removed as an expense immediately from the amount of contribution made, whereas variable costs are allocated to goods separately. Fixed expenses are also assigned to the cost of the product as overheads in absorption costing.

    The key differences between marginal costing and absorption costing are explained below:

    Meaning: The cost management approach of marginal costing is used to determine the overall cost of manufacturing. Absorption costing is a strategy for allocating or apportioning total expenses to multiple cost centres in order to estimate the cost of production for each cost centre individually.

    Cost Treatment: Variable and fixed costs are identified independently in marginal costing; variable costs are allocated to the product as product costs, while fixed expenses are considered period costs and subtracted straight from contribution to arrive at operational profits. Absorption costing analyses both fixed and variable expenses as product costs and makes product allocations.

    Classification of Overheads: Under marginal costing overheads are classified under fixed and variable.
    Under absorption costing it is classified as Production, Administration, and Selling & Distribution

    Determination of Profit: Managerial choices in absorption costing are based on profit, which is the difference between the sale price and the total cost. However, Marginal Costing focuses on ‘contribution,’ which is the difference between sales value and variable cost.

    Contribution = Sales – Variable Costs

     Valuation of W.I.P. and Finished Goods: 

    Work-in-process and stocks are valued at the total cost, which includes both variable and fixed expenses, in Absorption Costing. Work-in-progress and stocks are only evaluated at marginal cost in Marginal Costing. As a result, stock value in absorption costing is greater than in marginal costing.

     

     

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In: Cost Accounting

What are the important decision making areas of marginal costing?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 4:32 pm

    Some of the important decision-making areas where marginal costing technique is used are: Fixation of Selling Price: It helps in deciding selling price in various market scenarios ( During the recession, international market ) Decision relating to make or buy: Helps in making decisions regarding manRead more

    Some of the important decision-making areas where marginal costing technique is used are:

    Fixation of Selling Price: It helps in deciding selling price in various market scenarios ( During the recession, international market )

    Decision relating to make or buy: Helps in making decisions regarding manufacturing a good or buying it.

    Retaining or replacing machinery.

     Helps in deciding whether to sell the product in the home or in the export market.

    Expanding or contracting the production.

    Shutdown or continue operations.

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In: Cost Accounting

State the dis-advantages of Marginal Costing ?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 4:25 pm

    Disadvantages of Marginal Costing: Cost focus: A firm that uses this pricing approach on a regular basis will discover that it needs to keep expenses low in order to make a profit, which is ineffective if the company wants to move into a higher-service, higher-quality market segment. Long-term-priceRead more

    Disadvantages of Marginal Costing:

    • Cost focus: A firm that uses this pricing approach on a regular basis will discover that it needs to keep expenses low in order to make a profit, which is ineffective if the company wants to move into a higher-service, higher-quality market segment.
    • Long-term-price policy: This technique fails to provide any long-term price policy.
    • Time factor: The technique of marginal costing does not take into consideration the importance of the time factor.
    • Marginal costing analysis assumes that sales price per unit will remain the same on different levels of production but these may change in real life and give unrealistic results.
    • The problem of variable overheads: Marginal costing overcomes the problem of over and under-absorption of fixed overheads. Yet there is the problem in the case of variable overheads.
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In: Cost Accounting

Discuss the advantages of Marginal Costing ?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 4:18 pm

    Advantages of Marginal costing: Marginal Costing is a crucial approach for making managerial choices. It's also a useful tool for cost control and profit forecasting. The Technique is less complicated:  Because fixed overheads are not included in the cost of production, there is no need for a time-cRead more

    Advantages of Marginal costing: Marginal Costing is a crucial approach for making managerial choices. It’s also a useful tool for cost control and profit forecasting.

    The Technique is less complicated:  Because fixed overheads are not included in the cost of production, there is no need for a time-consuming and expensive way of calculating the overhead recovery rate, modifying it, and assigning overheads. As a result, there are no difficulties or ambiguity with this approach.

    A Vehicle for Cost Control:

    Marginal costing is a cost-control, cost-analysis, and cost-presentation method used by managers. It provides the data in a way that assists various levels of management in cost control. It is also a significant cost-cutting tool.

    Because this method only considers variable expenses that are always changeable, it becomes simpler to assign responsibility and exert control over them. Fixed expenses, on the other hand, may be successfully controlled because they are included in the profit calculation as a whole.

     Meaningful Managerial Reporting: The Marginal Costing method is a strong foundation for managerial reporting. The information provided by reports created using this approach is based on sales rather than production. As a result, it reflects the true condition of efficiency. The marginal costing approach accurately and clearly displays the impact of fixed costs on profit.

     Profit Planning: It helps in analysing Break-even point and thus helps in deciding profit.

    Easy Understanding of Income Statement: By assigning fixed and variable costs individually, management may readily comprehend the revenue statement. Furthermore, stock valuation is simplified since it is valued at a fixed marginal cost.

    Appraisal of Profitability: The technique of Marginal Costing is used to evaluate profitability. The revenue-earning potential of the various departments varies. Marginal cost analysis may be used to measure or evaluate the performance of each department or segment.

    Decision Making:The major benefit of marginal costing is that it assists management in making different critical managerial decisions, especially when dealing with situations that demand quick judgments.

    Price Policy and Price Determination: This technique contributes significantly to the area of price policy and price determination.

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In: Cost Accounting

What are the various features of Marginal Costing ?

  1. nadeem

    nadeem

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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 1:26 pm

    Features of marginal costing: Cost Classification: The marginal costing method clearly distinguishes between variable and fixed expenses. It is the variable cost on which a company's production and sales policies are based. Price Determination: Prices are calculated using marginal cost by adding conRead more

    Features of marginal costing:

    Cost Classification: The marginal costing method clearly distinguishes between variable and fixed expenses. It is the variable cost on which a company’s production and sales policies are based.

    Price Determination: Prices are calculated using marginal cost by adding contribution, which is the difference between the selling price and the variable sales costs.

    Managerial Decisions:  It is a technique of analysis and presentation of costs that helps management in taking many managerial decisions such as make or buy decisions, selling price decisions, etc.

    Marginal costing involves the techniques of both cost recording and cost reporting.

    A special form of Profit and Loss Account or Statement is prepared styled as Marginal Profit and Loss Account.

    The marginal costs or variable costs are treated as a cost of the product. The values of stock of finished goods and work-in-progress also comprise only the variable costs.

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In: Cost Accounting

Define the term Marginal Costing ?

  1. nadeem

    nadeem

    • MBA (finance and operations)
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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 1:17 pm
    This answer was edited.

    The Institute of Cost and Management Accountants’ publication A Report on Marginal Costing’ defines Marginal Costing: “The ascertainment, by differentiating between the fixed costs and variable cost, of marginal costs and of the effect on profit of changes in volume or type of output.” The phrase maRead more

    The Institute of Cost and Management Accountants’ publication A Report on Marginal Costing’ defines Marginal Costing: “The ascertainment, by differentiating between the fixed costs and variable cost, of marginal costs and of the effect on profit of changes in volume or type of output.”

    The phrase marginal cost refers to the extra cost of generating an additional unit of output, which may be calculated using the total variable cost given to one unit.

    The marginal cost, or variable cost, is charged to units of cost, whereas the fixed cost for the time is entirely written off against the contribution.

     

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In: Cost Accounting

For preparing a cost sheet the costs are classified into the following three broad heads: Discuss ?

  1. nadeem

    nadeem

    • MBA (finance and operations)
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    nadeem MBA (finance and operations)
    Added an answer on July 1, 2021 at 1:14 pm

    The three cost classification are: Finished or standing charges Maintenance charges Operating and running charges Finished and Standing Charges include:  These are those charges that are fixed and need to be paid. Such as: Insurance premium License fee Road tax Garage rent/ warehouse rent. MaintenanRead more

    The three cost classification are:

    1. Finished or standing charges
    2. Maintenance charges
    3. Operating and running charges

    Finished and Standing Charges include:  These are those charges that are fixed and need to be paid. Such as:

    • Insurance premium
    • License fee
    • Road tax
    • Garage rent/ warehouse rent.

    Maintenance Charges: These are charges incurred to keep the machinery and equipment in working condition. Such as:

    • Repair and Maintenance of vehicles.
    • Cost of spare parts
    • Cost of consumables ( oil, grease, lubricant, etc )

    Operating and Running charges: These are Variable Charges incurred to run machinery, factory, etc. Such as:

    • Cost of fuel
    • Cost of machine operator
    • Cost of supervisor

     

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