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Question
Marginal cost is
A.
Average cost per unit
B.
Cost of producing one additional unit
C.
Selling price of the product
D.
Cost of raw materials only
Answer ( Option B)

Cost of producing one additional unit

Solution

TYPE OF COST
1. Predetermined Cost 
2. Historical/Standard cost
3. Marginal cost  
1. Predetermined Cost :
  • A cost calculated before production based on all factors affecting the cost.
  • A predetermined cost calculated using management’s standards of efficient operations and expected expenses.
  • It is based on a desired standard achievable under real conditions.
Standard Cost:
  • Standard cost estimates cost per unit for labor, materials, and overheads based on predicted prices, wages, and overheads.
  • It represents the best estimate after removing inefficiencies and waste.
Advantages of Standard Cost:
  • Provides a more systematic and thorough cost analysis.
  • Reduces variations in price.
  • Measures management's best estimate of efficient plant operation.
  • Used for price setting and cost control through variance analysis.
Marginal Cost / Differential Cost / Incremental Cost:
  • It is the increase or decrease in total costs from producing or distributing additional or fewer units, products, or sales territories.
  • If fixed costs remain unchanged, the marginal cost is only the variable cost for producing one more unit.
  • These are future costs, anticipated for future operations.
  • Not recorded in regular accounting but used in budgeting.
Uses of Differential Costs:
  • Setting selling prices.
  • Deciding on machinery replacement.
  • Accepting offers.
  • Submitting bids.
 

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