Marginal Costing
• If changes the cost of production by increase or decrease the cost of production per unit as known as Marginal costing in economics.
• A system of determining cost of production by the excluding fixed expenses from total cost is known as Marginal costing.
• Marginal cost refers to the additional cost to produce each additional unit.
• For example, it may cost $10 to make 10 cups of Coffee.
• To make another cups would cost $0.80 per cup.
• Therefore, that is the marginal cost – the additional cost to produce one extra unit of output.
• Marginal cost comes from the cost of production.
Fixed cost
• Fixed costs remain the same regardless of production output.
• Fixed cost includes expenses that remain constant for a period of time irrespective of the level of outputs,
• like lease, rent, salaries, insurance, interest payment and loan payments etc.
Variable cost
• Variable costs change based on the amount of output produced.
• variable costs are expenses that change directly and proportionally to the changes in business activity level or volume,
• like direct labor, taxes, commissions, raw materials and operational expenses.
Advantages of Marginal Costing
1)Cost per Unit Same:-
• Under the marginal costing, system cost per unit is not change in the level of production.
2)No increase or decrease fixed cost:-
• In the marginal costing there is no increase or decrease the value of fixed cost in the level of
production.
3)Decision of production in the period of prosperity:-
• Marginal costing help to the management for taking decision of production in the period of prosperity.
• The marginal cost of various order can be determine and compare with selling price and only those giving largest contribution should be accepted.
4)Useful in depression:-
• It is also useful during depression.
• Price have to be reduce in the time of depression.
• Marginal costing indicates the level of price up to which price can be reduced.
5)Make or Buy Decision:-
• It becomes necessary to decide whether component or part is to be manufacture in the factory or buy from outside.
• Marginal costing is helpful to the management for taking decision of make or buy decision.
6)Dumping in Foreign Market:-
• When you accept the order from foreign market then marginal costing is useful to compare with home market.
7)Relation between Volume and Profit:-
• The effect of changes in volume of production to the profit. So there is a relationship between volume and profit.
8)Useful in Differentiate Cost Analysis:-
• Total Cost is divided into fixed cost and variable cost in the system of marginal costing.
9)Control Over Cost:-
• By dividing the total cost in two parts as a fixed cost and variable cost. It is easy to control cost.
• Fixed cost is a result of management.
10)Easy for Sales Manager to fix Selling Price:-
• Using Marginal Costing, The sales manager can fixed selling price per unit.
Limitations of Marginal Costing
• The classification of total costs into fixed and variable cost is difficult.
• In marginal costing historical data is used while management decisions are related to future events.
• It does not provide any standard for the evaluation of performance.
• Selling price fixed on the basis of marginal cost will be useful only for short period of time.
• Possibility of loss.
• Assessment of profitability on the marginal cost base can be used only in the short period of time.
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