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Marginal Cost Advantages and disadvantages PRESENTED BY: 	Joel Maxim Pais 	16018 	MBA II  	2010-2012 	Aloysius institute of management and information technology(AIMIT)
Advantages of Marginal Costing: 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.
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.
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.
 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.
Prevents Illogical Carry forwards It prevents the illogical carry-forwards in stock-valuation of some proportion of current years fixed overhead.
Accurate Overhead Recovery Rate:  It eliminates large balances left in overhead control accounts, which indicate the difficulty of ascertaining an accurate overhead recovery rate.
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.
Disadvantages of Marginal Costing Misleading Results:  It is very difficult to segregate all costs into fixed and variable costs very clearly, since all costs are variable in the long run. Hence such segregation sometimes may give misleading results.
Distorted Picture of Profits:  The closing stock consists of variable cost only and ignores fixed costs. This gives Distorted Picture of Profits.
Avoids Semi-Variable Costs:  Semi-Variable costs are not considered in the analysis.
Problem of Recovery of Overheads:  There is problem of under or over-recovery of overheads, since variable costs are apportioned on estimated basis and not on the actuals.
Ignorance of Time Factor:  Since the time factor is completely ignored; comparison of performance between two periods on the basis of contribution alone will give the misleading results.
Marginal cost

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Marginal cost

  • 1. Marginal Cost Advantages and disadvantages PRESENTED BY: Joel Maxim Pais 16018 MBA II 2010-2012 Aloysius institute of management and information technology(AIMIT)
  • 2. Advantages of Marginal Costing: 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.
  • 3. 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.
  • 4. 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.
  • 5. 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.
  • 6. Prevents Illogical Carry forwards It prevents the illogical carry-forwards in stock-valuation of some proportion of current years fixed overhead.
  • 7. Accurate Overhead Recovery Rate: It eliminates large balances left in overhead control accounts, which indicate the difficulty of ascertaining an accurate overhead recovery rate.
  • 8. 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.
  • 9. Disadvantages of Marginal Costing Misleading Results: It is very difficult to segregate all costs into fixed and variable costs very clearly, since all costs are variable in the long run. Hence such segregation sometimes may give misleading results.
  • 10. Distorted Picture of Profits: The closing stock consists of variable cost only and ignores fixed costs. This gives Distorted Picture of Profits.
  • 11. Avoids Semi-Variable Costs: Semi-Variable costs are not considered in the analysis.
  • 12. Problem of Recovery of Overheads: There is problem of under or over-recovery of overheads, since variable costs are apportioned on estimated basis and not on the actuals.
  • 13. Ignorance of Time Factor: Since the time factor is completely ignored; comparison of performance between two periods on the basis of contribution alone will give the misleading results.