14 Marginal Costing

CHAPTER

MULTIPLE CHOICE QUESTIONS

1. According to marginal costing assumptions, costs are influenced by __________ mainly.
(a) Output (b) Selling price
(c) Variable cost (d) Fixed cost

2. In _______ costing both variable and fixed cost are charged to products.
(a) Absorption (b) Marginal
(c) Both (a) & (b) (d) None of the above

3. Under marginal costing, stocks are valued at prime cost plus _________.
(a) Fixed manufacturing overheads (b) Variable manufacturing overheads
(c) Both (a) & (b) (d) None of the above

4. Under ________ costing, fixed cost are regarded as period cost.

(a) Marginal costing (b) Absorption costing
(c) Both (a) & (b) (d) None of the above

5. Under ________ costing, stock valuation gets affected due to impact of the related fixed costs.
(a) Marginal costing (b) Absorption costing
(c) Both (a) & (b) (d) None of the above

6. CVP analysis makes an attempt to measure variation in ______, and ______ with variation in _______.
(a) Cost; Volume; Profit (b) Profit; Volume; Cost
(c) Cost; Profit; Volume (d) None of the above

7. At break-even point, total contribution is just enough to cover______ costs.

(a) Variable cost (b) Fixed cost
(c) Both (a) & (b) (d) None of the above

8. Improvement in P/V Ratio can be done by _______.

(a) Increasing the selling price (b) Reducing the variable cost
(c) Changing the sales mix (d) All of the above
 9. P/V ratio will _______ at different levels of production.
(a) Decrease (b) Increase
(c) Remain Constant (d) None of the above

10. Improvements in margin of safety can be done by ________.

(a) Increasing the selling price (b) Increasing the volume of sales
(c) Reducing the variable cost (d) All of the above

11. ________ is formed at the break-even point at which the sales line cuts the total cost line.
(a) Angle of incidence (b) Angle of fixed cost
(c) Angle of profitability (d) None of the above

12. In ‘make or buy’ decision, it is profitable to buy from outside only when the supplier’s price is
below the firm’s own __________.
(a) Variable cost (b) Fixed cost
(c) Total cost (d) Prime cost

13. A company’s approach to a make or buy decision:

(a) Depends on whether the company is operating at or below normal value
(b) Involves an analysis of avoidable costs
(c) Should use absorption (full costing)
(d) Should use activity based costing

14. The cost behavior pattern for a company is as follows:

Activity (Units) 500 700 900

Total Cost (Rs.) 2,500 3,100 4,600

If fixed cost remains unchanged throughout all activity levels, which of the following statements
is true in relation to cost behavior?
(a) Variable cost per unit is constant for all activity levels.
(b) Variable cost per unit increase above 700 units.
(c) Total average cost per unit is constant for all activity levels.
(d) Variable cost per unit falls above 50 units.

15. An increase in fixed costs will result in which of the following?

(a) A decrease in the contribution to sales ratio
(b) A decrease in the constitution per unit
(c) An increase in the break-even point sales level
(d) An increase in the margin of safety

16. Under marginal costing the cost of product includes:

(a) Prime cost only (b) Prime cost and variable overheads
(c) prime cost and fixed overheads (d) Prime cost and factory overheads
Marginal Costing 63
17. Reporting under marginal costing is accomplished by:
(a) Treating all costs as period costs
(b) Eliminating the work-in-progress inventory account
(c) Matching variable costs against revenue and treating fixed cost as period costs
(d) Including only variable costs in income statement

18. Period costs are:

(a) Variable costs (b) fixed costs
(c) Prime costs (d) Overhead costs

19. When sales and production (in units) are same then profit under:
(a) Marginal costing is higher than that of absorption costing
(b) Marginal costing is lower than that of absorption costing
(c) Marginal costing is equal to that of absorption costing
(d) None of the above

20. When sales exceed production (in units) then profit under:
(a) Marginal costing is higher than that of absorption costing
(b) Marginal costing is lower than that of absorption costing
(c) Marginal costing is equal to that of absorption costing
(d) None of the above

21. The difference between marginal costing and absorption costing is regarding the treatment of:
(a) Prime cost (b) Fixed overheads
(c) Direct materials (d) Variable overheads

22. Under profit volume ratio, the term profit

(a) Means the sales proceeds in excess of total costs
(b) Means the same thing as is generally understood
(c) It is a misnomer, it in fact refers to contribution i.e. (sales revenue – variable costs)
(d) None of the above

23. Factors which can change the break-even point:

(a) Change in fixed costs (b) Change in variable costs
(c) Change in the selling price (d) All of the above

24. If PV ratio is 40% of sales then what about the remaining 60% of sales:
(a) Profit (b) Fixed cost
(c) Variable cost (d) Margin of safety

25. The PV ratio of a product is 0.6 and profit is ₹9,000. The margin of safety is:
(a) ₹5,400 (b) ₹15,000
(c) ₹22,500 (d) ₹3,600
64 Cost & Management Accounting
26. The present unit cost data for a product are: selling price ₹15; variable cost ₹8. If selling price is
reduced by 10% and variable costs are increased by 12.5%, which of the following is the amended
contribution to sales ratio?
(a) 0.50 (b) 0.666
(c) 0.25 (d) 0.333

27. Existing sales are ₹1,00,000 (500 units), variable costs are ₹60,000 and fixed costs are ₹24,000.
If selling price is reduced by 10% which of the following is the break-even sales quantity?
(a) 400 (b) 450
(c) 500 (d) 550

28. Product A has a contribution to sales ratio of 0.50; Product B has a contribution to sales ratio of
0.40. At present 100 units of each product are sold. If total sales units remain at the present level
but an extra 20 units of B are substituted for 20 units of A, which of the following is true for the
overall positions?
(a) Contribution to sales ratio remain unchanged
(b) Contribution to sales ratio rises from 0.45 to 0.50
(c) Contribution to sales ratio rises from 0.45 to 0.46
(d) Contribution to sales ratio falls from 0.45 to 0.44

29. A company’s fixed cost amount to ₹120 lakhs p.a. and its overall P/V ratio is 0.4 the annual sales
of the company should be ₹_______ lakhs to have a margin of safety of 25%.
(a) 400 (b) 450
(c) 500 (d) 550

30. The variable cost of a product increases by 10% and the management raises the unit selling price
by 10%. The fixed cost remain unchanged .Then BEP of the firm ___________.
(a) Increases (b) Decreases
(c) Remains same (d) Raise in long term

31. A company maintains a Margin of safety of 25% on its current sales and earns a profit of ₹30 lakhs
per annum. If the company has a profit Volume (P/V) Ratio of 40%, its current sales amount to
₹____ lakhs.
(a) 200 (b) 250
(c) 300 (d) 350

32. A company an annual turnover of ₹200 lakhs and an average C/S ratio of 40%. It makes 10%
profit on sales before charging depreciation and interest which amount to ₹10 lakhs and ₹15
lakhs respectively. The annual fixed cost of the company is ₹_________ lakhs.
(a) 80 (b) 60
(c) 75 (d) 55
Marginal Costing 65
33. Sale for two consecutive months of a company are ₹3,80,000 and ₹4,20,000 the company’s net
profits for these months amounted to ₹24,000 and ₹40,000 respectively. There is no change in
C/S ratio or fixed costs. The P/V ratio of the company is _________.
(a) 25% (b) 30%
(c) 35% (d) 40%

34. A product sells for ₹8 each with variable cost of ₹5 each. Fixed costs are budgeted at ₹18,000 or
₹2 per unit. The margin of safety is:
(a) 50% (b) 66.67%
(c) 33.33% (d) None of the above

35. A company determines its selling price by marking up variable cost 60%. In addition, the company
uses frequent selling price mark downs to stimulate sales. If the mark down average 10%, then
the company’s contribution margin ratio is:
(a) 27.5% (b) 37.58%
(c) 30.56% (d) 41.75%
Answer Key

1. (a) 2. (a) 3. (b) 4. (a) 5. (b) 6. (c) 7. (b) 8. (d) 9. (c) 10. (d)
11. (a) 12. (a) 13. (b) 14. (b) 15. (c) 16. (b) 17. (c) 18. (b) 19. (c) 20. (a)
21. (b) 22. (c) 23. (d) 24. (c) 25. (b) 26. (d) 27. (a) 28. (d) 29. (a) 30. (c)
31. (c) 32. (c) 33. (d) 34. (c) 35. (c)

66 Cost & Management Accounting