B. Contribution of each unit towards fixed costs and profit
C. Valuation of closing stock only
D. Distribution of profits among shareholders
Marginal costing focuses on the contribution margin (sales minus variable costs) to cover fixed costs and profit.
2. Which of the following is an advantage of marginal costing?
A. Ignores fixed costs completely
B. Required for statutory financial statements
C. Helps in decision making regarding pricing and production
D. Automatically calculates taxes
Marginal costing aids management decisions like pricing, make or buy, product selection, and optimizing production.
3. Which of the following is a limitation of marginal costing?
A. Not suitable for long-term cost planning
B. Ignores variable costs
C. Complex valuation of closing stock
D. Only applicable to service industries
Marginal costing is primarily for short-term decision-making and may not accurately reflect long-term costs.
4. Breakeven point (BEP) is the point where:
A. Total revenue exceeds total fixed costs
B. Variable cost equals total cost
C. Contribution margin is zero
D. Total sales equals total costs (no profit, no loss)
Breakeven point is where total revenue exactly covers total costs, resulting in zero profit or loss.
5. Contribution margin is calculated as:
A. Sales revenue minus variable costs
B. Fixed costs minus variable costs
C. Total costs minus sales revenue
D. Sales revenue minus fixed costs
Contribution margin shows how much of sales revenue is available to cover fixed costs and contribute to profit.
6. If a product has a selling price of ₹200, variable cost ₹120, and fixed costs ₹40, what is the breakeven sales in units?
A. 5 units
B. 10 units
C. 1 unit
D. 2 units
Contribution per unit = Selling Price - Variable Cost = 200 - 120 = 80; BEP units = Fixed Costs / Contribution per unit = 40 / 80 = 0.5 units (approx 1 unit for practical purposes).
7. One application of marginal costing is:
A. Annual tax planning
B. Determining product pricing in short-term decisions
C. Auditing financial statements
D. Preparing balance sheet only
Marginal costing is mainly used to aid short-term decision-making such as pricing, product selection, and resource allocation.
8. In Cost-Volume-Profit (CVP) analysis, what does the P/V ratio indicate?
A. Ratio of profit to variable cost
B. Ratio of price to sales
C. Contribution per unit as a percentage of sales
D. Ratio of fixed cost to total cost
P/V ratio = (Contribution / Sales) × 100. It shows the percentage of each sales rupee contributing to fixed costs and profit.
9. A company has sales of ₹2,00,000, variable costs ₹1,20,000, and fixed costs ₹50,000. What is the contribution?
P/V ratio measures contribution relative to sales. A higher P/V ratio means each rupee of sales generates more contribution, leading to higher profit with increased sales.
14. In absorption costing, which costs are included in product cost?
A. Only variable costs
B. Both fixed and variable production costs
C. Only fixed costs
D. Administrative and selling costs only
Absorption costing includes all manufacturing costs – variable and fixed – in product cost, for inventory valuation and profit reporting.
15. What is a key advantage of absorption costing over marginal costing?
A. Easier short-term decision making
B. Ignores fixed costs
C. Matches all production costs with revenues for accurate profit reporting
D. Simple calculation of contribution margin
Absorption costing allocates all production costs to inventory and cost of goods sold, giving a complete picture of profit.
16. In which situation can absorption costing profit appear higher than marginal costing profit?
A. When sales equal production
B. When fixed costs are zero
C. When variable costs increase
D. When production exceeds sales (inventory increases)
Absorption costing allocates fixed costs to inventory; when production exceeds sales, some fixed costs remain in stock, inflating reported profit.
17. Which of the following is a limitation of absorption costing?
A. Can mislead short-term decision making due to fixed cost allocation
B. Ignores stock valuation
C. Only considers variable costs
D. Cannot calculate profit
Fixed costs included in stock valuation may distort short-term profitability, which is a limitation for decision-making.
18. Under absorption costing, closing stock is valued at:
A. Only variable production cost
B. Selling price minus profit margin
C. Total production cost per unit (variable + fixed)
D. Fixed cost only
Closing stock under absorption costing includes all production costs, both variable and fixed, for accurate profit calculation.
19. How does absorption costing treat fixed manufacturing overheads?
A. Expensed entirely in the period incurred
B. Allocated to units produced and carried in stock
C. Ignored for costing
D. Treated as period cost only
Fixed manufacturing overheads are absorbed into the cost of each unit, affecting stock valuation and profit reporting.
20. Which costing method is mandatory for financial reporting under Indian Accounting Standards (Ind AS)?
A. Marginal costing
B. Standard costing
C. Variable costing
D. Absorption costing
Absorption costing is required for external financial reporting, as per Indian Accounting Standards, because it values inventory including all production costs.
21. Which of the following is a key difference between marginal costing and absorption costing?
A. Marginal costing includes fixed costs in product cost; absorption costing excludes them
B. Absorption costing considers only variable costs; marginal costing considers all costs
C. Marginal costing treats fixed costs as period costs; absorption costing absorbs fixed costs into product cost
D. There is no difference; both methods calculate income the same way
In marginal costing, fixed costs are charged to the period as expenses, while absorption costing includes fixed manufacturing overheads in product cost.
22. When production exceeds sales, which costing method shows higher profit?
A. Marginal costing
B. Both methods show same profit
C. It depends on variable costs only
D. Absorption costing
Absorption costing allocates fixed costs to inventory. When production exceeds sales, some fixed costs remain in closing stock, inflating profit compared to marginal costing.
23. How is net income measured under marginal costing?
A. Sales minus total costs (fixed + variable)
B. Contribution margin minus fixed costs
C. Sales minus fixed costs only
D. Contribution margin plus fixed costs
Net income under marginal costing is calculated as contribution margin (Sales - Variable Costs) minus total fixed costs.
24. Under absorption costing, income is affected by changes in:
A. Inventory levels
B. Selling prices only
C. Variable costs only
D. Contribution per unit only
Since fixed costs are absorbed into inventory, changes in production and closing stock levels affect reported income under absorption costing.
25. Which statement is true regarding income comparison between marginal and absorption costing?
A. Marginal costing always shows higher profit
B. Absorption costing always shows lower profit
C. Profit may differ depending on inventory changes
D. Both methods always show same profit
Differences in reported income occur because absorption costing allocates fixed costs to inventory, whereas marginal costing charges them to the period.
26. If fixed costs are ₹50,000, variable costs per unit ₹40, selling price per unit ₹60, and 2,000 units are produced but only 1,500 units are sold, which costing method will report higher profit?
A. Marginal costing
B. Both will report same profit
C. It depends on variable costs only
D. Absorption costing
Under absorption costing, part of fixed costs remains in unsold inventory, increasing reported profit compared to marginal costing.
27. Which of the following is a disadvantage of comparing income under marginal and absorption costing?
A. Difficult to calculate contribution
B. Differences in inventory levels can mislead management about true profitability
C. Absorption costing ignores fixed costs
D. Marginal costing always inflates profit
Comparing profits can be misleading if inventory levels change, because absorption costing allocates fixed costs to stock while marginal costing does not.
