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  Merits of Marginal Costing

Introduction to Applications or Merits of Marginal Costing

Marginal costing is a very helpful method of costing and has huge potential for management in several managerial tasks and decision- making process. The applications of marginal costing are explained as follows:

1) Cost Control: One of the significant challenges in front of the management is the control of cost. In the modern competitive environment, raise in the selling price for enhancing the profit margin can be unsafe as it may lead to loss of market share. Another way to enhance the profit is cost reduction and cost control. Cost control purposes at not permitting the cost to rise across the present level. Marginal costing method helps in this task through segregating the costs among variable and fixed. While fixed costs stay unchanged irrespective of the production volume, variable costs change as per to the production volume. Specific items of fixed costs are not controllable at the lower management or middle management level. In such circumstances it will be more worthwhile to focus on the variable costs for cost control purpose. Because the segregation of costs among fixed and variable is completed in the marginal costing, concentration can be made on variable costs than fixed cost and in this way not necessary efforts to control fixed costs can be eliminated.

2) Profit Planning: other significant application of marginal costing is the area of profit planning. Profit planning, usually termed as budget or plan of operation might be described as the planning of future operations to get a specified profit goal. The marginal costing method helps to generate data needed for profit planning and decision-making. For instance, computation of profit if there is a change in the product mix, impact on profit if there is a alteration in the selling price, alteration in profit if one of the product is discontinued or if there is a opening of new product, decision about the change in the sales mix are some of the areas of profit planning in which essential information can be generated through marginal costing for decision making. The segregation of costs among fixed and variable is thus very useful in profit planning.

3) Key Factor Analysis: The management has to arrange a plan after taking into consideration the constraints, if any, on the several resources. These key factors might be availability of raw material, availability of skilled labour, machine hour's availability, or the market demand of the product. Marginal costing helps the management to make a decision the best production plan via using the scarce resources in the most helpful manner and thus optimize the profits. For instance, if raw material is the key factor and there availability is limited to a specific quantity and the company are manufacturing three products, A, B and C. In such types of cases marginal costing method helps to prepare a statement that depicts the amount of contribution per kg of material. The product that yields highest contribution per kg of raw material is provided the priority and produced to the maximum possible extent. Then the other products are taken up in the order of priority. So the resulting product mix will yield highest amount of profit in the specified situation.

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