Question

In CVP analysis, gross margin is a less-useful concept than contribution margin." Do you agree? Explain.

Q2: When might a company use budgeted costs rather than actual costs to compute direct-labor rates?

Answer 1

Question – 1;

Yes, I am agree that In CVP analysis, gross margin is a less-useful concept than contribution margin."

As we know that gross margin is less useful concept than contribution margin because in case of gross margin we study only difference between sale revenue and associated costs whereas under contribution margin we focus on the distinction between fixed costs and variable costs.

Hence, under contribution margin approach we get more relevant study of associated costs due to difference between fixed and variable costs. As we know that fixed costs are irrelevant with the level of sales & production that is why CVP analysis should focus on the contribution margin.

Thus it is true that In CVP analysis, gross margin is a less-useful concept than contribution margin.

Question – 2;

A company use budgeted costs rather than actual costs to compute direct-labor rates when it is not easy to calculate actual costs and under actual costs basis we have to find out actual costs first but normally we see that to compute actual costs is not possible before end of the year that is why it is helpful to use budgeted costs because direct labor rates should be calculated on the basis of budgeted costs so that direct labor rates can be determined in real time.