Which of the following are NOT assumptions of Marginal Costing? A. The total cost can be segregated into fixed and variable components. B. Fixed costs per unit of production remains constant. C. Variable cost remains constant per unit of output. D. The selling price per unit remains unchanged. E. Variable cost is variable per unit. Choose the correct answer from the options given below:
B and E only
Understanding Marginal Costing Assumptions
Marginal Costing is a costing technique where only variable costs are considered as product costs. Fixed costs are treated as period costs and are expensed in the period they are incurred. This method is often used for internal decision-making, such as pricing, production planning, and 'make or buy' decisions. It relies on several key assumptions about cost behavior and selling price.
Key Assumptions of Marginal Costing
Let's analyze each statement to determine if it is an assumption of Marginal Costing:
- Statement A: The total cost can be segregated into fixed and variable components.
This is a fundamental assumption of Marginal Costing. It requires costs to be classified based on their behavior in relation to changes in the level of activity (output or sales).
- Statement B: Fixed costs per unit of production remains constant.
This is NOT an assumption of Marginal Costing. While total fixed costs are assumed to remain constant within a relevant range of activity, fixed cost per unit changes with the level of production. As production increases, the total fixed cost is spread over more units, causing the fixed cost per unit to decrease. Conversely, as production decreases, the fixed cost per unit increases.
- Statement C: Variable cost remains constant per unit of output.
This is a core assumption of Marginal Costing. It assumes that the variable cost incurred for producing or selling one additional unit is constant, regardless of the volume. Examples include direct materials or direct labor per unit.
- Statement D: The selling price per unit remains unchanged.
This is typically assumed in basic Marginal Costing analysis, especially for Cost-Volume-Profit (CVP) analysis. It simplifies calculations by assuming that each unit is sold at the same price, irrespective of the sales volume.
- Statement E: Variable cost is variable per unit.
This statement is confusingly worded. If it means "variable cost *changes* per unit as output changes," then it contradicts Statement C and is NOT an assumption. If it means "variable cost *in total* changes with output," that is true, but saying "variable cost is variable per unit" is incorrect as the assumption (Statement C) is that variable cost per unit is constant. Based on the standard assumptions, the intended meaning is likely that it is not constant per unit, which is false. Thus, this is NOT an assumption.
Identifying Non-Assumptions
Based on the analysis:
- Statement A is an assumption.
- Statement B is NOT an assumption.
- Statement C is an assumption.
- Statement D is an assumption.
- Statement E is NOT an assumption (because variable cost per unit is assumed constant).
Therefore, the statements that are NOT assumptions of Marginal Costing are B and E.
| Statement | Description | Is it an Assumption? |
|---|---|---|
| A | Total cost is segregated into fixed and variable. | Yes |
| B | Fixed costs per unit remains constant. | No |
| C | Variable cost per unit remains constant. | Yes |
| D | Selling price per unit remains unchanged. | Yes |
| E | Variable cost is variable per unit. | No (Variable cost per unit is constant) |
The option that lists B and E only is the correct answer.
Revision Table: Marginal Costing Principles
| Cost/Revenue Item | Behavior (Total) | Behavior (Per Unit) | Marginal Costing Assumption |
|---|---|---|---|
| Fixed Costs | Constant (within relevant range) | Varies with output | Total Fixed Costs are Constant |
| Variable Costs | Varies proportionally with output | Constant | Variable Cost Per Unit is Constant |
| Selling Price | Varies with volume | Constant | Selling Price Per Unit is Constant |
Additional Information on Cost Behavior in Marginal Costing
It is crucial to distinguish between total costs and costs per unit when understanding cost behavior in Marginal Costing. Let's elaborate on why statements B and E are not considered assumptions:
- Why Fixed Costs Per Unit Vary: If total fixed costs are $10,000, and you produce 1,000 units, the fixed cost per unit is $10 ($10,000 / 1,000). If you produce 2,000 units, the fixed cost per unit becomes $5 ($10,000 / 2,000). Thus, fixed cost per unit is inversely related to the volume of production. Assuming it remains constant (Statement B) is incorrect.
- Why Variable Costs Per Unit are Assumed Constant: The assumption (Statement C) is that the cost of inputs required for one unit of output (like raw materials) is constant. For example, if each unit requires 1 kg of material costing $5/kg, the variable material cost per unit is always $5, regardless of how many units are produced. Total variable cost will change (100 units * $5 = $500, 200 units * $5 = $1000), but the cost *per unit* remains $5. Statement E saying "Variable cost is variable per unit" contradicts this fundamental assumption of a constant variable cost per unit.
These distinctions are key to performing accurate CVP analysis and other decisions based on Marginal Costing principles.
Important Questions from Marginal Costing
The Break Even point expressed in amount of sales in rupees of X Ltd having selling Price of ₹ 20 per unit, variable cost of ₹ 14 per unit and fixed cost of ₹ 7,92,000 is:
- Which one of the following is not correct ?
From the following information, find out the number of units that must be sold by the firm to earn profit of ₹ 80,000 per year.
Sales price : ₹ 25 per unit
Variable manufacturing costs – ₹ 12 per unit
Variable selling costs – ₹ 3 per unit
Fixed factory overheads – ₹ 5,00,000
Fixed selling costs – ₹ 3,00,000
