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Advantages of Marginal Costing

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 asked

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Data?1494421730 answered

Dear Friend > Advantages of Marginal Costing 1. Pricing decisions: Since marginal cost per unit is constant from period to period within a short span of time, firm decisions on pricing policy can be taken. If fixed cost is included, the unit cost will change from day to day depending upon the volume of output. This will make decision task difficult. 2. Overhead variances: Overheads are recovered in costing on the basis of pre-determined rates. This creates the problem of treatment of under or over-recovery of overheads, if fixed overheads were included. Marginal costing avoids such under or over recovery of overheads. 3. True Profit: It is argued that under the marginal costing technique, the stock of finished goods and work in progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period. 4. Break-even analysis: Marginal costing helps in the preparation of break-even analysis, which shows the effect of increasing or decreasing production activity on the profitability of the company. 5. Control over expenditure: Segregation of expenses as fixed and variable helps the management to exercise control over expenditure. The management can compare the actual variable expenses with the budgeted variable expenses and take corrective action through variance analysis. 6. Business decision-making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc. Thanks

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

Dear Friend, **Meaning*Marginal costing is a method of cost accounting and decision-making used for internal reporting in which only marginal costs are charged to cost units and fixed costs are treated as a lump sum. It is also known as direct, variable, and contribution costing. In marginal costing, only variable costs are used to make decisions. It does not consider fixed costs, which are assumed to be associated with the time periods in which they were incurred. **Advantages**Marginal costing can be a useful tool for evaluating some financial types of decisions. Some of are as follows 1.Automation investments: Marginal costing is useful to determine how much a firm stands to gain or lose by automating some function. The key costs to take into consideration are the incremental labor cost of any employees who will be terminated versus the new costs incurred from equipment purchase and subsequent maintenance. 2.Cost reporting: Marginal costing is very useful for controlling variable costs, because you can create a variance analysis report that compares the actual variable cost to what the variable cost per unit should have been. 3.Customer profitability: Marginal costing can help determine which customers are worth keeping and which are worth eliminating. 4.Internal inventory reporting: Since a firm must include indirect costs in its inventory in external reports, and these can take a long time to complete, marginal costing is useful for internal inventory reporting. 5.Profit-volume relationship: Marginal costing is useful for plotting changes in profit levels as sales volumes change. It is relatively simple to create a marginal costing table that points out the volume levels at which additional marginal costs will be incurred, so that management can estimate the amount of profit at different levels of corporate activity. 6.Outsourcing: Marginal costing is useful for deciding whether to manufacture an item in-house or maintain a capability in-house, or whether to outsource it. 7.Cost control: Marginal costing makes it easier to determine and control costs of production. By avoiding the arbitrary allocation of fixed overhead costs, management can concentrate on achieving and maintaining a uniform and consistent marginal cost. 8.Simplicity: Marginal costing is simple to understand and operate and it can be combined with other forms of costing (e.g. budgetary costing and standard costing) without much difficulty. 9.Elimination of cost variance per unit: Since fixed overheads are not charged to the cost of production in marginal costing, units have a standard cost. 10.Short-term profit planning: Marginal costing can help in short-term profit planning and is easily demonstrated with break-even charts and profit graphs. Comparative profitability can be easily assessed and brought to the notice of the management for decision-making. 11.Accurate overhead recovery rate: This method of costing eliminates large balances left in overhead control accounts, which makes it easier to ascertain an accurate overhead recovery rate. 12.Maximum return to the business: With marginal costing, the effects of alternative sales or production policies are more readily appreciated and assessed, ensuring that the decisions taken will yield the maximum return to the business.

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