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  Features of Marginal Costing

Introduction to Features of Marginal Costing

As described above, marginal costing is not a separate technique of costing but it is a method of costing different from the traditional costing that is also termed as 'Absorption Costing'. The unique features of Marginal Costing are as follows:

1. In marginal costing, costs are separates into fixed and variable. Just variable costs are charged to the production that is involved in the cost of production. Fixed costs are not involved in the cost of production that means that they are not absorbed in the production. Though this does not mean that they are not taking into consideration or ignored at all. They are taken into consideration when calculating the final profit or loss through debiting them to the Costing Profit and Loss Account. The logic after excluding fixed costs from cost of production is that fixed costs do not stay fixed on per unit basis. On per unit basis, the fixed cost will get raise if the production decreases when it will reduce on per unit basis if the production increases. So fixed cost per unit are the entire time variable. By this view, a question comes into the mind that on what basis they should be charged to the product? Likewise, there is a problem of under and over absorption of these overheads also. So, it is advocated that fixed cost should be rejected from the cost of production but should be taken into account when calculating the final figure of profit through charging them to the Costing Profit and Loss Account.

2. Other significant feature of marginal costing is the valuation of inventory is prepared at variable cost only. That means that variable costs just are taken into consideration when valuing the inventory. Fixed costs are removed from the inventory valuation since they are largely period costs and associated to a specific period or year. If they are involved in the inventory valuation, they will be forward to the next period since the closing inventory for a specific year is the opening inventory for the next year. So charging current year's costs to the next year after that will be against the principle and therefore fixed costs are not involved in the inventory valuation. Secondly, as explained in earlier, fixed costs are not involved in the cost of production, and so involving them in the inventory valuation is not necessary from this angle.

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