Introduction
- Marginal costing is a new technique in cost accounting.
- It is not a costing method like Job costing, Process costing, or Operating costing.
- Marginal costing helps management understand profitability by analyzing how costs behave.
- It is essential for profit planning, cost control, and decision-making in all industries.
- As a technique, it can be combined with any costing method to create a complete cost accounting system.
- It can also be used with other techniques like budgeting and standard costing.
- Marginal costing focuses on how changes in production or sales levels affect costs and profits.
Meaning of Marginal Cost
- Marginal cost is the cost of producing one extra unit of the output.
- It is the amount by which total cost increases when one extra unit is produced,
- or
- the amount of cost which can be avoided by producing one unit less.
Definitions of Marginal Cost
- The Institute of Cost and Works Accounts, London.
- “The amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unit”
- The Institute of Chartered Accountants. England.
- “Is the very expense (whether of production, selling or distribution) incurred by taking of a particular decision”
Meaning of Marginal Costing
- Marginal Costing is an accounting technique which ascertains marginal cost by differentiating between fixed or period, and variable or product costs.
- This technique aims to charge only those costs of the cost of the product that vary directly with sales volumes.
- Those costs would be direct material, direct labour, and factory overhead expenses such as supplies, some indirect labour, and power.
- The cost of the product would not include fixed or non-variable expenses such as depreciation, factory insurance, taxes and supervisory salaries etc.
Definitions of Marginal Costing
- The National Association of Accountants.
- “these method proposes that fixed factory expenses be classified as period expenses and be written off currently as is generally done with selling and administration expenses, and that only the variable costs become the basis of inventory value and profit determination”
- The Institute of Cost and Works Accounts, London.
- “Marginal Costing is the ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs. in this technique of the costing only variable costs are charged to operation, processes or products, leaving all indirect cost to be written off against profit in the period in which arise”
Advantages of Marginal Costing
- Valuable Aid (Help) of Management.
- Aid (Help) to Profit Planning
- Cost Analysis Possible
- Simple to Understand and Application
- Facilitates Cost Control
Limitations of Marginal Costing
- Difficulty in Application
- Difficulty in Analysis
- Improper Basis for Pricing
- Ignores Time Factor
- Useful in Short-Run
- Unacceptable (Unsuitable) by Taxation Authorities
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