Advantages of Marginal Costing
The following are the principal advantages of marginal costing:
1) Simple to Use and Understand
Marginal costing method is straightforward and handy to use. Since this technique excludes ongoing costs and uses only variable fees, the value statements are clean to apprehend and put in force.
2) Avoids Under-Absorption of Overhead
This approach does not now use the procedure of allocation, absorption, or apportionment of constant fees and accordingly reduces the problems associated with below-absorption of constant value.
3) Aids in Production Planning
Variable fees in step with the unit are consistent and remain equal no matter the level of interest. The use of these costs simplifies the system of production control.
4) No Over-Valuation of Stocks
Marginal costing does not deliver ahead ongoing costs within the form of stock valuation and, therefore, avoids the opportunity of over-inflating income by using inflated closing inventory valuation.
5) Facilitates Calculation
Marginal costing allows the calculation of numerous critical factors, which include key factors, make or purchase selection, pricing choice, optimum sales blend, and so on.
6) Helps with Management
Marginal costing facilitates the management in making key decisions. These choices might also relate to shutdown, optimum production and sales blend design, and overall performance assessment.
Disadvantages of Marginal Costing
Marginal costing has the following risks:
1) Segregation of Costs
Marginal costing divides expenses into constant and variable classes. However, in lots of cases, such segregation is not clear. For example, costs related to fees of bonuses to personnel.
2) No Cognizance of Fixed Overhead
Marginal costing ignores constant overheads and, as a result, is unrealistic.
3) Not Designed for Contract Costing
Marginal costing can’t be used for job or contract costing purposes.
4) Unrealistic Assumptions
Marginal costing makes unrealistic assumptions even when analyzing.
5) Apportionment of Fixed Costs
Marginal costing requires calculating different damage-even factors for distinctive products. This results in the problem of apportionment of fixed prices.
6) Multiple Assumptions
Marginal costing uses various assumptions for analysis. Such assumptions may not be real within the actual life situation.