From the following two statements of Assertion (A) and Reason (R), indicate the correct code : Assertion (A) : From the marginal costing approach point of view, the marginal cost is compared with the purchase price. Reason (R) : If the marginal cost is less than the purchase price it should be purchased rather than manufactured. Codes :
Make or Buy Analysis: Assertion and Reason
This question concerns the 'make or buy' decision using the marginal costing approach.
Assertion (A) Analysis
The assertion states that the marginal cost is compared with the purchase price in the marginal costing approach. This is fundamentally correct. When deciding whether to produce a component internally ('make') or purchase it from an external supplier ('buy'), marginal costing focuses on comparing the relevant costs. The relevant cost for 'making' is typically the marginal cost (or variable cost) of production, and the relevant cost for 'buying' is the purchase price from the supplier.
Reason (R) Analysis
The reason suggests that if the marginal cost is less than the purchase price, the item should be purchased rather than manufactured. This statement reverses the standard decision rule. The correct principle is:
- If Marginal Cost of Manufacturing < Purchase Price, it is more economical to MANUFACTURE the item.
- If Marginal Cost of Manufacturing > Purchase Price, it is more economical to PURCHASE the item.
Therefore, the reason provided is incorrect.
Conclusion
Based on the analysis, Assertion (A) is correct as it accurately describes the comparison made in marginal costing for make-or-buy decisions. Reason (R) is incorrect because it states the wrong decision rule.
Thus, the correct code is that Assertion (A) is correct, but Reason (R) is not correct.
Important Questions from Cost and Management Accounting
The marginal cost curve is ______
A company raises Rs. 1,00,000 by issue of 1000, 10% debentures of Rs. 100 each at a discount of 2% redeemable after 10 years. If the corporate tax rate is 40%, what would be the cost of capital?
1. 6.82%
2. 5.98%
3. 6.18%
4. 5.5%
Which of the following statements are true?
a) Pay - back period method considers all cash flows of a project
b) Pay - back period method concerns more with the recovery of cost than profitability
c) Net Present Value represents net addition to the wealth of shareholders
d) Accounting Rate of Return method incorporates risk as well as time value of money
Choose the correct option from those below.
Match List I with List II
List I
(Type of Costing)
List II
(Description)
A. Marginal Costing I. Integrated approach to determine product features, product price, product costs and product design that helps ensure a company to earn reasonable profit on new products. B. ABC Costing II. The amount of any given volume of output by which the aggregate costs are changed if the volume of output is increased by one unit. C. Target Costing III. Used when identical units are produced through an on-going series of production steps. D. Process Costing IV. Costing system in which costs being with tracing of activities and then to producing the product. Choose the correct answer from the options given below:
Which one of the following is PV ratio for the company?
