Target Costing Key Features, Advantages and Examples

Target Costing Key Features, Advantages and Examples

Marginal costing is immensely helpful in determination of selling prices under different situations like recession, depression, introduction of new product, etc. Correct pricing policy can be developed under the marginal costing technique with the help of the cost information, revealed therein. Marginal costing technique is helpful in preparation of flexible budgets as the costs are split into fixed and variable portions. The fixed costs are also controlled by ascertaining them separately for computing profit and for control.

Marginal Costing: Meaning, Features and Advantages

Marginal costing technique is helpful in preparation of flexible budgets as the costs are classified into fixed and variable. The constant focus is on cost and volume and their effect on profit pave the way for cost reduction. Another important application of marginal costing is the area of profit planning.

What is Target Costing?

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting. A financial professional will offer guidance based on the information provided and offer a no-obligation Marginal Costing: Meaning, Features and Advantages call to better understand your situation. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

What are the four features of marginal costing?

Following are the main features of Marginal Costing:

Even semi fixed cost is segregated into fixed and variable cost. (iii) Variable costs alone are charged to production. Fixed costs are recovered from contribution. (iv) Valuation of stock of work in progress and finished goods is done on the basis of marginal cost.

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. (iii) The value of stock cannot be accepted by taxation authorities since it deflates profit.

Absorption Costing: Definition, Features, Advantages, Disadvantages

Therefore it ignores time element and is not suitable for long term decisions. Nowadays, increasing automation is leading to an increase in fixed costs. If such increasing fixed costs are ignored, the costing system cannot be effective and dependable. Marginal costing, if applied alone, will not be of much use unless it is combined with other techniques like standard costing and budgetary control. Successful business has to go in a balanced way regarding selling production functions.

What are the elements of marginal costing?

The marginal cost varies directly with the volume of production and marginal cost per unit remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all variable overheads. It does not contain any element of fixed cost which is kept separate under marginal cost technique.

If the marginal cost of producing one additional unit is lower than the per-unit price, the producer has the potential to gain a profit. It is a fixed amount irrespective of the level of capacity achieved. In the marginal costing technique, profit is measured by contribution less fixed overheads which include the fixed portion of semi-variable overheads also. CIMA defines marginal costing as “the accounting system in which variable cost arc charged to the cost units and fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision-making.” Marginal costing is not a distinct method of costing like job costing or process costing.

How confident are you in your long term financial plan?

The additional production may necessitate purchase of some specialised equipment and thus involve interest and depreciation cost. It is advisable to expand and produce if the enterprise is able to save some costs by doing so. Some­times it is seller’s market, while at other times it may be difficult to sell the goods even at cost. These situations may justify to sell the goods at or even below marginal cost for a short while. Selling the goods at or even below marginal cost cannot be resorted to as a matter of routine. Impor­tance of selecting proper measure of volume should not be ignored.

Marginal Costing: Meaning, Features and Advantages

The elimination of fixed costs renders cost comparison of jobs difficult. The disadvantages, demerits or limitations of marginal costing are briefly explained below. The advantages, merits of marginal costing are briefly explained below. In the graph below, marginal revenue is shown by the lower pink line.

Main Types of Liabilities in Accounting

It then pays an extra $50 to manufacture an extra 100 product units. The marginal cost, however, is $0.50 per unit ($50/100). For public utility companies, the marginal cost pricing approach is quite beneficial. It aids them in increasing productivity or maximising capacity utilisation.

Cost control can be effected through comparing fixed and variable elements of costs with budgeted costs. This technique assumes that variable cost per unit is the same for any level of production. Facilitates cost control – By separating the fixed and variable costs, marginal costing provides an excellent means of controlling costs.

What is the best definition of marginal cost?

By separating fixed overheads from production costs, it lessens the degree to which overheads are over- or under-recovered. At a certain point in production, the advantage of producing one extra unit and earning money from that product will lower the total cost of manufacturing the product line. Finding that point or level as soon as possible is essential for manufacturing cost optimization. (v) This technique also cannot be used in the case of cost plus contracts unless fixed costs and profits are considered. Time taken for the completion of jobs is not given due attention because marginal cost excludes fixed expenses which are connected with time. Fixed expenses should be considered if the suitable comparison of two jobs is to be made.

Marginal costs are not affected by the level of fixed cost. Since fixed costs do not vary with (depend on) changes in quantity, MC is ∆VC/∆Q. Thus if fixed cost were to double, the marginal cost MC would not be affected, and consequently, the profit-maximizing quantity and price would not change. This can be illustrated by graphing the short run total cost curve and the short-run variable cost curve.

Copyright © smarthrsolution