Advantages and Disadvantages of Marginal Costing.

Q74. What is marginal costing? What are the advantages and disadvantages of marginal costing?
Ans. The ascertainment of marginal cost and of the effect on profit of changes volume or type of object by differentiating between fixed cost and variable cost. Stock are valued at variable cost only.

Advantages of Marginal Costing:

  1.  It helps a firm in taking decisions about pricing policy.
  2.  There is no over absorption or under absorption of overheads.
  3. Under marginal costing technique, closing stock are valued at marginal cost which gives the true profit position.
  4.  It helps in caring about break even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company.
  5. Segregation of expenses helps the management to exercise control over expenditure.
  6.  Marginal costing helps the management in taking number of decision.

Disadvantages of Marginal Costing:

  1.  Difficult to classify costs into variable and fixed.
  2. Contribution itself is not a guide unless it is linked with the key factory.
  3. Sales staff may mistake marginal cost for total cost and sell at a price which will result any loss or low profit.
  4. In large contracts, fixed nature should be included in the valuation of work in progress.
  5. Some assumption is not realistic.

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