What are Limitations and advantages of marginal costing?

Answer 1

Advantages of Marginal Costing:00.Cost Control: Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost useful to the various levels of management.

1. Simplicity: Marginal Costing is simple to understand and operate; it can be combined with other forms of costing, such as, budgetary costing, standard costing without much difficulty.

2.Elimination of varying charge per unit: In marginal Costing fixed overheads are not charged to the cost of production due to this the effect of varying charges per unit is avoided.

3.Short-Term Profit Planning: It helps in short-term profit planning by break-even charts and profit graphs. Comparative profitability can be easily assessed and brought to the notice of the management for decision-making.

4.Prevents Illogical Carry forwards: It prevents the illogical carry-forwards in stock-valuation of some proportion of current years fixed overhead.

5.Accurate Overhead Recovery Rate: It eliminates large balances left in overhead control accounts, which indicate the difficulty of ascertaining an accurate overhead recovery rate.

6.Maximum return to the business: The effects of alternative sales or production policies can be more readily appreciated and assessed, and decisions taken will yield the maximum return to the business.