Advantages of Marginal Costing
The advantages, merits of marginal costing are briefly explained below.
1. The marginal costing technique is very simple to understand and easy to operate. The reason is that the fixed costs are not included in the cost of production and there is no arbitrary apportionment of fixed costs.
2. The current year fixed costs is not carried forward to the next year. As such, cost and profit are not vitiated. Cost comparisons become meaningful.
3. The contribution is used as a tool in managerial decision-making. It provides a more reliable measure for decision-making.
4. Marginal costing shows more clearly the impact on profit of fluctuations in the volume of sales.
5. Under absorption and over absorption of overheads problems are not arisen under marginal costing.
6. The marginal costing technique can be combined with standard costing.
7. The prevailing relationship between cost, selling price and volume are properly explained in clear terms.
8. It shows the relative contributions to profit that are made by each of a number of products and show where the sales effort should be contracted.
9. The management can take short run tactical decisions with the help of marginal costing information.
Disadvantages of Marginal Costing
The disadvantages, demerits or limitations of marginal costing are briefly explained below.
1. The total costs cannot be easily segregated into fixed costs and variable costs.
2. Moreover, it is also very difficult to per-determine the degree of variability of semi-variable costs.
3. Under marginal costing, the fixed costs remain constant and variable costs are varying according to level of output. In reality, the fixed costs do not remain constant and the variable costs are not varying according to level of output.
4. There is no meaning in the exclusion of fixed costs from the valuation of finished goods since the fixed costs are incurred for the purpose of manufacture of products.
5. In the case of loss by fire, the full amount of loss cannot be recovered from the insurance company since the stocks are under valued.
6. Tax authorities do not accept the valuation of stock since the shock does not show true value.
7. The calculation of variable overheads does not include all the variable overheads.
8. The profit fluctuates as per the fluctuation of sales volume. Hence, the preparation of periodic operating statements becomes unrealistic.
9. The elimination of fixed costs renders cost comparison of jobs difficult.
10. The management cannot take a quality decision with the help of contribution alone. The contribution may vary if new techniques followed in the production process.
11. The fixed costs are constant only for short period. In the long run, all the costs are variable.