Today in this article we will be
discussing and understanding about Marginal Costing, Features of Marginal
Costing, Approach of Marginal Costing and Opinions in favor and Critics of
Marginal Costing
Marginal Costing
Marginal costing is a special
technique used to assess and study the effect on profit because of changes in
the type of output by providing information. This concept is based on Behavioral
Costing. Marginal Costing is also known as Variable Costing. Sometimes Marginal
Costing and Direct Costing are used interchangeable.
Contribution
The difference between the selling
price and variable cost is called Contribution. Contribution indicates the
amount of sales available to cover the revenue and fixed cost.
Features of Marginal Costing
The features of Marginal Costing
includes,
§ All the costs are classified into two categories either under
Variable Cost or Fixed Cost.
§ Fixed Costs include only period cost not product costs.
§ Goods in WIP is taken and valued at Marginal Cost of Production
§ In Marginal Costing Process products are valued at their marginal
value.
§ Prices are determined based on Marginal Costing and Contribution
Margin.
§ Data focuses on total contribution and contribution from each
product.
Approach of Marginal Costing
The approach of Marginal Costing is
based on the difference between the product costs and period costs wherein
product cost is considered as variable cost and period cost is considered as
fixed cost.
Advantages
of Marginal Costing
The advantages of Marginal Costing
are,
§ Marginal Costing is a combination of standard costing and budgetary
controls which makes in more effective.
§ Over or Under absorption of overheads problem can be overcome.
§ The categorization of costs into variable and fixed costs makes
budgetary control simple, easy and
effective.
§ Fixed cost are period costs and should be charged in concern period
irrespective of production level.
§ It helps to formulate production policies based on Sales.
§ Addition of fixed cost in product costs misrepresents the
comparability of products produced in different volumes.
§ It helps to facilitate Profit Volume Analysis.
Disadvantages of Marginal Costing
The disadvantages of Marginal Costing
are,
§ The classification of various costs under variable and fixed cost
is quiet difficult and even the classifications only holds good for short run
and not in long run.
§ Marginal Costing gives much importance to Sales.
§ Elimination of Fixed cost while valuation of inventories does not
makes sense.
§ Pricing based on Contribution alone does not make much sense.
§ Under or over absorption of variable cost still exists.
§ Marginal Costing approach if not used properly may result in
improper price setting.
§ The assumption of variable cost will remain constant holds true only
till a limited range of activity.
§ The exclusion of fixed cost while valuation of inventory deviate from acceptable accounting practices.
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