Marginal Costing
Marginal Costing is a form of cost accounting that traces all fixed costs to be sunk until the end of the year and then these costs are accounted for all at once. This means that for any short-term decisions, all fixed costs involved in the process are not taken into account and so the results are focused entirely on the variable costs. This form of cost accounting is credited with creating better short-term decision making in business as it leads to better cost/benefit analysis and having this critical information as reference leads to better decision making.
The concept of Marginal Costing is based on the thought that certain expenses in the business should only be allocated for a given length of time, after which they will be burdensome and so be accounted for all at once. An example of this type of expense would be those associated with long-term projects or those used up or consumed within a certain period. By using this method of cost accounting, businesses can use the information to make more accurate decisions.
The advantage of Marginal Costing is that it gives companies access to the costs associated with a given product or service without having to include all the costs associated with running a business in the calculation. It enables companies to focus solely on the costs associated with the service or product a company deals in, leaving other costs out. This helps small businesses in particular as it gives them information with which to make decisions from even if the revenues of the business are small.
Marginal Costing is often used in the pricing of products, particularly in the pricing of certain services. By understanding the costs that go into the production and delivery of a product, it is easier to make a cost-benefit analysis of the product in terms of the services it provides. This type of analysis is especially important for perishable services such as airlines tickets and event tickets.
Using Marginal Costing can be beneficial to companies as it separates the fixed costs from the variable costs, giving companies a better understanding of how the costs contribute to the overall price of the product. This can then be used to help the company adjust their prices accordingly.
The main disadvantage of using Marginal Costing is that it is not an accurate representation of the true cost of a product or service as it does not include any of the fixed costs of running a business. This can make decisions more difficult as it does not give a comprehensive view of the true cost of a product.
In conclusion, Marginal Costing is a useful form of cost accounting that helps companies to better understand the costs associated with the production or delivery of a product or service. It can help small businesses to make better decisions, as it takes only the variable costs into account which can be beneficial in terms of pricing decisions. However, it is not a true reflection of the real cost of a product or service as it does not include all the other costs associated with running a business.
