Marginal Cost Essay

Marginal Cost

AS per CIMA, London, Marginal Costing is defined as ‘the ascertainment of Marginal Costing and of the effect on profit of changes in volume or type of output by differentiating between Fixed and Variable Cost.’

CIMA, London, more defines Marginal Cost as ‘the accounting system in which Variable Cost charged to the cost units and Fixed Costs of the period are written off in full against the aggregate contribution’.(Bhattacharyya, 2011)

Advantages of Marginal Cost

Marginal Costing has several advantages given below:

Marginal Absorption provides useful data for managerial Decision Making. It is a very effective tool of profit planning. It facilitates control over Variable Cost by avoiding random distribution or allocation of Fixed

It provides useful information to the management for pricing the product of the enterprise, as the variable cost per unit is constant from period to period within a short span of time, the decision on pricing the product can be easily be taken by the management. (Bhattacharyya, 2011)

It helps the management in the process of the cost control by concentrating on Variable Cost alone, as Fixed Costs are non-controllable in such a short span of time. It provides many useful methods to the management for decision making like BE Analysis, Profit-Volume Ratio, and Variable Cost Ratio and so on. It ensures a greater control over the cost through Standards Costing and Budgeting Control. Use of Marginal Methods is very simple as it is very easy to understand and very simple to operate. (Bhattacharyya,

This technique cannot be successfully applied in ‘Cost plus Contract’ unless an enough percentage over the variable cost is charged from lessen to over the fixed cost and profit. As this method does not provide any specific parameter for control, cost control can be better achieved with the help of Standard Costing and Budgetary Control instead of relying on this method. (Bhattacharyya, 2011)

It is not very useful for the valuation of list in case of irregular loss, and such evaluation is not accepted from the view point of the income tax authorities and auditors. This method does not resolve the difficulties involved in the apportionment of variable overheads. It ignores to reflect the impact of the time factor and value of investment made for the determination of Product Cost. (Bhattacharyya, 2011)

Variance