Marginal Costing Part 1 Ques
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What is marginal cost in the context of costing?
Marginal cost is the additional cost incurred in producing one extra unit of output, comprising only variable costs such as direct materials, direct labour, and variable overheads.
What is the formula for calculating contribution in marginal costing?
Contribution equals selling price minus variable cost per unit.
How does marginal costing differ from absorption costing?
Marginal costing charges only variable costs to products and treats fixed costs as period costs written off in full, whereas absorption costing absorbs both fixed and variable overheads into product costs.
What does a higher P/V ratio indicate about a product's profitability?
Higher P/V ratio indicates greater profitability and faster profit earning.
What is the contribution formula used in marginal costing?
Contribution = Sales Revenue minus Variable Cost (or Marginal Cost). It represents the amount available to cover fixed costs and generate profit.
How is the P/V ratio calculated using contribution and sales?
P/V ratio equals contribution divided by sales, expressed as percentage.
What does the term 'contribution margin ratio' mean?
The contribution margin ratio (also called P/V ratio) is the proportion of contribution to sales, expressed as (Contribution ÷ Sales) × 100, indicating how much each rupee of sales contributes toward fixed costs and profit.
What is the relationship between P/V ratio and break-even point?
Higher P/V ratio leads to lower break-even point, indicating better efficiency.
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