Examine The Relevance Of Marginal Costing In The Present Say Context Of Global Business Environment, With Suitable Illustrations, Comparing It With Other Techniques?
Answers
Marginal costing is a method of cost accounting and decision-making used for internal reporting in which only marginal costs are charged to cost units and fixed costs are treated as a lump sum. It is also known as direct, variable, and contribution costing.
In marginal costing, only variable costs are used to make decisions. It does not consider fixed costs, which are assumed to be associated with the time periods in which they were incurred.
Marginal costs include:
The costs actually incurred when you manufacture a product
The incremental increase in costs when you ramp up production
The costs that disappear when you shut down a production line
The costs that disappear when you shut down an entire subsidiary
In this technique, cost data is presented with variable costs and fixed costs shown separately for the purpose of managerial decision-making.
Marginal costing is not a method of costing like process costing or job costing. Rather, it is simply a way to analyze cost data for the guidance of management, usually for the purpose of understanding the effect of profit changes due to the volume of output.
The direct costing concept is extremely useful for short-term decisions, but can lead to harmful results if used for long-term decision-making, since it does not include all costs that may apply to a longer-term decision. Furthermore, marginal costing does not comply with external reporting standards.