Advantages of Marginal Costing
- Cost-volume-profit relationship data wanted for profit planning purposes is readily obtained from the regular accounting statements. Hence management does not have to work with two separate sets of data to relate one to the other.
- The profit for a period is not affected by changes in absorption of fixed expenses resulting from building or reducing inventory. Other things remaining equal (e.g. selling prices, costs, sales mix), profits move in the same direction as sales when direct costing is in use.
- Manufacturing cost and income statements in the direct cost form follow management’s thinking more closely than does the absorption cost form for these statements. For this reason, management finds it easier to understand and use direct cost reports.
- The impact of fixed costs on profits is emphasized because the total amount of such cost for the period appears in the income statement.
- Marginal income figures facilitate relative appraisal of products, territories, classes of customers, and other segments of the business without having the results obscured by allocation of joint fixed costs.
- Marginal costing lies in with such effective plans for cost control as standard costs and flexible budgets.
- Marginal costing furnishes a better and more logical basis for the fixation of sales prices as well as tendering for contracts when business is at low ebb.
- Break-even point can be determined only on the basis of marginal costing.
