Marginal Costing, Research Paper Example

A marginal cost is the difference between that of Fixed and Variable cost.  As such relative to a given volume of output, then any additional output is normally obtained at a lesser value than proportionate cost because certain cost elements remain fixed whereas the remainder tend to rise in proportion to output. The inverse also applies in so far as a fall in output is often associated with a lower aggregate cost.  (Brown)

The concept   The costing technique shows where one variable cost is charged to the cost unit produced and as such illustrates the changes in volume or type of output by the differentiation of fixed and variable cost.  This technique has also be referred to as ‘direct costing’.  Within the concept of marginal costing the fixed costs are never allocated or charged out against production. Once the calculation of marginal cost has been determined it is then possible to calculate the contribution i.e. the excess of revenue over that of marginal cost. (College Accounting Coach).

Advantages & Disadvantages   This costing technique is described as having the following advantages and disadvantages:

Nevertheless,  Marginal costing is widely used in the decision making of managers in manufacturing industry although you need to be aware of the limitations. (E.Harris). Marginal costing concepts lead to the ability to perform and calculate other ratios like the Profit Volume Ratio (P/V Ratio) (Reddy)

Characteristics  Marginal costing assists management by the provision of an analysis technique that facilitates managerial decision making. It considers all elements of a cost that are classified into fixed and variable components. The fixed costs will be charged to the Profit and Loss Account in the period that they are incurred. Stock and work-in-progress and that of finished goods are valued at marginal cost. The use of Break-Even analysis is an additional component of marginal costing. Marginal costs plays a key part in that of profit planning in an organization and contains techniques that are easy to understand and apply.

Marginal costing also helps when you are trying to determine ‘make or buy’ decisions for building a specific component. Hence the price being paid to outside suppliers can be compared to the marginal cost of producing the component in-house. Where this is deemed to be lower than the external price it will be cheaper to make the product in-house.

Works Cited

Brown, Glen. Marginal Costing and Absorption Costing. 2010. 17 3 2011 <http://www.globusz.com/ebooks/Costing/00000012.htm>.

College Accounting Coach. Marginal Costing : Features, Advantages and Disadvantages. 23 8 2006. 17 5 2011 <http://basiccollegeaccounting.com/marginal-costing-its-features-advantages-and-disadvantages/>.

E.Harris. Marginal Costing. London: Chartered Institute of Management Accountants, 1995.

Reddy, R.J. Cost Accounting & Controlsystems. New Delhi: APH Publisjing, 2004.