Question

The accountant suggests that a standard marginal costing system may
be more suitable. He asks you to outline the strengths and
weaknesses of both systems and recommend the most suitable.

The Board of Anderson Ltd. want to adopt ‘ideal’ standards because
they feel it will encourage harder work. You are asked to produce a
brief report giving your views.

Answer 1

Strengths of standard costing;

Following are the main strengths of standard costing system;

1. Standards helps in controlling actual costs thus as a result it leads to ascertain efficiency or inefficiency of actual performance.

2. It helps in finding out the real variances. So a firm can tackle its weak points efficiently.

3. It helps in determining future possible costs estimates so that proper arrangement can be made efficiently.

4. Standard costing system helps in valuation of left invetory effectively.

5. It gives a broad idea to the management in advance so that management can take required actions for future time.

Weaknesses of standard costing;

Following are the main Weaknesses of standard costing system;

1. This system of costing requires high R&D expenses. So as a result it will lead to high operating costs for costing management.

2. For small firms and companies it is very difficult to adopt standard costing system.

3. If a firm or company is dealing in non-standards products then adoption of standard costing will lead to major losses.

4. Inaccurate standards may lead to overall inefficiency in the costing system. Hence we can say if predetermined standards are not correct then it will not be good for the particular firm & company.

Strengths of marginal costing;

Following are the main strengths of marginal costing system;

1. Very simple & easy in implementation hence this system can be adopted by any type of firm.

2. It helps in taking good & relevant managerial decision because it helps in separate fixed costs and variable costs and we know that fixed costs are sunk costs so these sunk costs are not much useful in decision making.

3. Contribution margin is the basis of decision making in this costing system hence this helps in reliable decision making.

4. No much R&D is required for such decision making hence operating costs of this costing system will be lower.

Weaknesses of marginal costing;

Following are the main weaknesses of marginal costing system;

1. Separation of fixed and variable costs is very difficult task, so this system requires some additional efforts and additional man power.

2. Determining variability of the cost items in advance is not much easy.

3. This costing system does not consider fixed costs in decision making. And we know that fixed costs are major part of overall costs in any firm so decisions taken on the basis of marginal cost may be misleading sometime.

4. In case of marginal costing, preparation of periodic operating statements becomes unrealistic.

5. We know that fixed costs remain fixed in very short- period of time only but in case of long-period all these fixed costs become variable in nature. Thus marginal costing system will not be good in all cases.

So on the basis of above given strengths & weaknesses of both system, it is clear that both system can be suitable in some specific situation. In other words we can say that one costing system can not be good for a firm in all situation.

So, The Board of Anderson Ltd. decision about adopting ‘ideal’ standards will be good because ideal standards always help in making actual performance more accurate. Hence we can say that due to predetermined ideal standards employees of the firm will do hard work to meet these standards. Thus overall we can say that such standard costing system is very helpful for a firm.