ABC Corp. manufactures a product that yields the by-product, “Y”. The only cost associated with Y are selling costs of P.10 for each unit sold. ABC accounts for sales of Y by deducting Y’s separable costs from Y’s sales, and then deducting this net amount from the major product’s cost of goods sold. Y’s sales were
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
ABC Corp. manufactures a product that yields the by-product, “Y”. The only cost associated with Y are selling costs of P.10 for each unit sold. ABC accounts for sales of Y by deducting Y’s separable costs from Y’s sales, and then deducting this net amount from the major product’s cost of goods sold. Y’s sales were 100,000 units at P1 each. If ABC changes its method of accounting for Y’s sales by showing the net amount as additional sales revenue, then ABC’s gross margin would:
Increase by P90,000
Increase by 100,000
Increase by 110,000
Be unaffected
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