What is Marginal costing
Marginal costing takes into account only the variable cost
and fixed cost are ignored. The marginal costing treats the fixed cost as
period cost. The concept is really helpful in decision making. The inventories
are calculated on the bases of variable cost. In other word marginal cost takes
into account only those cost which vary with level of activity.
The marginal costing provides helpful information to the management
for the purposes of budget preparation, short term planning, cost control etc.
The other important aspect of marginal costing that it provides management the
bases for mathematical calculation for decision making like break even
analyses.
Limitation of marginal costing
It does not give a true picture of product cost. Especially
when the fixed overhead form a major portion of product cost then the marginal
costing is of little use as decision making tool.
It ignores the fixed cost so management has no controlling
procedures for fixed cost and management plan or over plans about the variable
cost of the product and the fixed cost remains the un touched area .Because the
focus remains on the variable cost so management adopt more controls for the
variable cost and the fixed cost may jump un expectedly.
This method the inventories can not be accurately calculated
and therefore the figure can not be used to report in the financial statements.
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