Definition
Standard marginal costing is a system of cost ascertainment and control in which predetermined standards for marginal costs and income generated for products and operations are set. These standards are periodically compared with actual marginal costs incurred and income generated to establish any variances. This approach aids businesses in managing and controlling costs, evaluating performance, and making informed decisions.
Examples
- Manufacturing Industry: A toy manufacturer sets a standard marginal cost of $5 per toy. At the end of the month, they compare this standard with the actual marginal cost, which turns out to be $6 per toy, revealing a variance of $1 per toy.
- Service Industry: A consulting firm sets a standard marginal cost of $100 per consulting hour. After a quarter, they find that the actual marginal cost varies, sometimes higher or lower, depending on various factors like labor costs, helping the firm to adjust future standards.
- Retail Industry: A retail chain sets a standard marginal cost of $2 per unit sold. Monthly comparisons reveal actual selling costs, helping the retail chain tweak operational efficiencies and supplier contracts.
Frequently Asked Questions (FAQs)
What is the purpose of using standard marginal costing?
The purpose of using standard marginal costing is to set benchmarks for marginal costs and income, allowing organizations to control costs, identify inefficiencies, and improve decision-making by comparing actual performance against these standards.
How are variances identified in standard marginal costing?
Variances are identified by comparing the predetermined standards set for marginal costs and income against the actual marginal costs incurred and income generated. This helps in determining deviations and necessary corrective actions.
What are the benefits of standard marginal costing?
The benefits include improved cost control, enhanced decision-making, better performance evaluation, and the ability to identify operational inefficiencies promptly.
Can standard marginal costing be used in all industries?
Yes, standard marginal costing can be applied across various industries, including manufacturing, services, and retail, to control costs and improve operational efficiencies.
What influences the setting of standards in marginal costing?
Standards in marginal costing are influenced by historical data, industry benchmarks, managerial expertise, and anticipated economic conditions.
- Marginal Costing: A costing technique where only variable costs are considered while fixed costs are treated as period expenses.
- Cost Control: The practice of managing and regulating expenses to reduce wastage and improve profitability.
- Variance Analysis: The process of investigating the difference between standard costs and actual costs.
- Budgeting: Allocating financial resources to different activities in anticipation of future financial conditions.
Online References
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan: This book provides thorough coverage of different costing methods and practices.
- “Management and Cost Accounting” by Colin Drury: An excellent resource for understanding cost management and various costing systems.
Accounting Basics: “Standard Marginal Costing” Fundamentals Quiz
### What is the primary purpose of standard marginal costing?
- [ ] To calculate fixed costs precisely.
- [x] To set and compare standards for marginal costs and income periodically.
- [ ] To determine total costs per unit.
- [ ] To analyze production techniques.
> **Explanation:** The primary purpose of standard marginal costing is to set and periodically compare standards for marginal costs and income, which helps in identifying variances and controlling costs.
### Which element is NOT typically included in marginal costing?
- [x] Fixed costs
- [ ] Variable costs
- [ ] Direct labor
- [ ] Direct materials
> **Explanation:** In marginal costing, only variable costs (e.g., direct labor, direct materials) are included, whereas fixed costs are treated as period expenses and are not included in the product cost.
### How are variances in standard marginal costing identified?
- [ ] By comparing actual total costs to total revenues.
- [x] By comparing actual marginal costs and income to predetermined standards.
- [ ] By comparing actual fixed costs to fixed budgeted costs.
- [ ] By reviewing annual financial statements.
> **Explanation:** Variances in standard marginal costing are identified by comparing actual marginal costs and income to the predetermined standards set previously.
### What corrective action is typically taken when a variance is identified?
- [ ] Increase production output.
- [ ] Lay off workers.
- [x] Investigate the cause and implement improvements.
- [ ] Ignore the variance and proceed as usual.
> **Explanation:** When a variance is identified, the typical corrective action involves investigating the cause of the variance and implementing improvements to align actual performance with the standards.
### Why might a company use historical data in setting standards for marginal costs?
- [ ] To favor recent market trends.
- [ ] To avoid competition.
- [x] To provide a reliable baseline for setting realistic standards.
- [ ] To simplify accounting records.
> **Explanation:** Using historical data gives a reliable baseline for setting realistic standards as it reflects past performance and helps in forecasting reasonable future costs and income.
### Which industry benefits from standard marginal costing by comparing consulting hours to set standards?
- [ ] Retail Industry
- [ ] Manufacturing Industry
- [x] Service Industry
- [ ] Agriculture Industry
> **Explanation:** The Service Industry benefits particularly from standard marginal costing by comparing the set standards for consulting hours to the actual hours, allowing for the identification of inefficiencies and cost control.
### What does variance analysis in standard marginal costing help in identifying?
- [ ] Revenue sources
- [ ] Asset depreciation
- [ ] Inventory levels
- [x] Cost inefficiencies and performance issues
> **Explanation:** Variance analysis in standard marginal costing helps in identifying cost inefficiencies and performance issues by comparing actual outcomes to set standards.
### When setting standards in marginal costing, what should be considered besides historical data?
- [ ] Inventory levels
- [ ] Marketing strategies
- [ ] Supervisor's preferences
- [x] Industry benchmarks and managerial expertise
> **Explanation:** Besides historical data, industry benchmarks and managerial expertise are crucial in setting realistic and attainable standards in marginal costing.
### In what way does standard marginal costing facilitate improved decision-making?
- [ ] By increasing capital expenditure
- [ ] By neglecting fixed costs
- [x] By providing actual vs. standard cost comparisons
- [ ] By boosting product prices
> **Explanation:** Standard marginal costing facilitates improved decision-making through actual vs. standard cost comparisons, helping managers to identify areas that need improvement.
### What results from comparing standard marginal costs and actual marginal costs?
- [ ] Enhanced production volumes
- [ ] Improved branding strategies
- [x] Identification of variances
- [ ] Exceeding budget limits
> **Explanation:** Comparing standard marginal costs to actual marginal costs helps in identifying variances, which can then be addressed to improve cost control and efficiency.
Thank you for confirming your understanding of Standard Marginal Costing through this comprehensive accounting term explanation and engaging quiz questions. Continue to enhance your financial knowledge and apply these concepts practically for better business performance!
