What is meant by the term opportunity cost

Assignment Help Business Management

Reference no: EM131627905

MODULE TITLE: BUSINESS MANAGEMENT TECHNIQUES

TOPIC TITLE: COSTING TECHNIQUES

LESSON 3: MARGINAL COSTING APPLICATIONS AND COMPARISON WITH ABSORPTION COSTING

INTRODUCTION - The purpose of this lesson is to study the applications of marginal costing and to compare the technique to absorption costing.

YOUR AIMS - At the end of this lesson you should be able to:

apply marginal costing to the following situations; product mix, make or buy decisions and pricing short-term contracts
understand that a limiting factor can affect the mix and quantities of products
understand the concept of opportunity cost
appreciate that marginal and absorption costing produce different profit statements when stock valuation is involved
appreciate the relative advantages of each costing technique.

QUESTIONS -

1. An upholstery company has the following costs for its product range:

	Wing Chair £	Club Chair £	Recliner Chair £
Labour - Joiners	20	40	35
- Fitters	20	25	30
Materials - Timber	70	60	70
- Cloth	50	60	70
Selling price	250	275	325
Expected Demand (no. of chairs)	500	400	350

Fixed Costs are £ 75 000

The cloth fitters are in short supply with only 5000 hours available. They are paid £5 per hour.

What is the most profitable production mix?

2. What is meant by the term opportunity cost?

3. Under what conditions might a business accept a contract at a selling price below its normal level?

4. How are stocks valued under marginal costing and absorption costing?

Reference no: EM131627905

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