Which costing method is best for short-term decision-making?
Practice Questions
1 question
Q1
Which costing method is best for short-term decision-making?
Absorption costing
Marginal costing
Activity-based costing
Standard costing
Marginal costing is best for short-term decision-making as it focuses on variable costs and contribution margin.
Questions & Step-by-step Solutions
1 item
Q
Q: Which costing method is best for short-term decision-making?
Solution: Marginal costing is best for short-term decision-making as it focuses on variable costs and contribution margin.
Steps: 5
Step 1: Understand what costing methods are. Costing methods help businesses determine how much it costs to produce their products or services.
Step 2: Learn about marginal costing. Marginal costing is a method that only considers variable costs (costs that change with production levels) and ignores fixed costs (costs that stay the same regardless of production).
Step 3: Know the importance of contribution margin. Contribution margin is the amount left from sales after variable costs are subtracted. It helps in understanding how much money is available to cover fixed costs and profit.
Step 4: Recognize that short-term decision-making often involves quick decisions about pricing, production levels, or whether to accept special orders. Marginal costing provides clear insights into how these decisions affect profitability.
Step 5: Conclude that marginal costing is best for short-term decision-making because it focuses on the costs that will change with the decision, making it easier to see the impact on profits.
