Marginal costing, Its Advantages and Disadvantages

Marginal Costing

It is a costing technique where only variable cost or direct cost will be charged to the cost unit produced.

Marginal costing also shows the effect on profit of changes in volume/type of output by differentiating between fixed and variable costs.

Salient Points:

• Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing;

• In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred;

• Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs.

• The marginal cost statement is the basic document/format to capture the marginal costs.

Advantages of Marginal Costing:

• It is simple to understand re: variable versus fixed cost concept;

• A useful short term survival costing technique particularly in very competitive environment or recessions where orders are accepted as long as it covers the marginal cost of the business and the excess over the marginal cost contributes toward fixed costs so that losses are kept to a minimum;

• Its shows the relationship between cost, price and volume;

• Under or over absorption do not arise in marginal costing;

• Stock valuations are not distorted with present years fixed costs;

• Its provide better information hence is a useful managerial decision making tool;

• It concentrates on the controllable aspects of business by separating fixed and variable costs

• The effect of production and sales policies is more clearly seen and understood.

Disadvantages Of Marginal Costing

• Marginal cost has its limitation since it makes use of historical data while decisions by management relates to future events;

• It ignores fixed costs to products as if they are not important to production;

• Stock valuation under this type of costing is not accepted by the Inland Revenue as it’s ignore the fixed cost element;

• It fails to recognize that in the long run, fixed costs may become variable;

• Its oversimplified costs into fixed and variable as if it is so simply to demarcate them;

• It’s not a good costing technique in the long run for pricing decision as it ignores fixed cost. In the long run, management must consider the total costs not only the variable portion;

• Difficulty to classify properly variable and fixed cost perfectly, hence stock valuation can be distorted if fixed cost is classify as variable

What is Absorption costing, Its Advantages and Disadvantages

Absorption Costing: -

It is a costing technique where all normal costs whether it is variable or fixed costs are charged to cost units produced.

Unlike marginal costing which take the fixed cost as period cost.

Advantages of Absorption Costing:

• It recognizes the importance of fixed costs in production;

• This method is accepted by Inland Revenue as stock is not undervalued;

• This method is always used to prepare financial accounts;

• When production remains constant but sales fluctuate absorption costing will show less fluctuation in net profit and

• Unlike marginal costing where fixed costs are agreed to change into variable cost, it is cost into the stock value hence distorting stock valuation.

Disadvantages of Absorption Costing:

• As absorption costing emphasized on total cost namely both variable and fixed, it is not so useful for management to use to make decision, planning and control;

• as the manager’s emphasis is on total cost, the cost volume profit relationship is ignored. The manager needs to use his intuition to make the decision.

Difference between in the end and at the end

"In the end = finally, after a long time:

In the end, I got a visa for Russia.

At the end = at the point where something stops:

I think the film’s a bit weak at the end. p. 450

Difference between on time and in time

difference between on time and in time?

Michael Swan’s excellent Practical English Usage (Oxford University Press), provides a succinct answer to both of these questions:

"On time = at the planned time; neither late nor early:

Peter wants the meeting to start exactly on time.

In time = with enough time to spare; before the last moment:

He would have died if they hadn’t got him to the hospital in time." p. 450

Difference between when and while

Both when and while can be used to talk about actions or situations that take place at the same time.

Swan identifies the following differences:

1 Backgrounds

We can use both words to introduce a longer 'background' action or situation, which is/was going on when something else happens/happened.

			Somebody broke into the house when they were playing cards.
			While they were playing cards, somebody broke into the house.

Note that when and while clauses can go at the beginning or end of sentences.

2 Simultaneous long actions

We usually use while to say that two longer actions or situations go / went on at the same time.

While you were reading the paper, I was working.

If we are talking about ages and periods of life, we use when:

			When I was a child we lived in London (NOT While I was a child …)
			His parents died when he was twelve (NOT … while he was twelve)

3 Simultaneous short actions

We can use (just) when to say that two short actions or events happen / happened at the same time:

I thought of it (just) when you opened your mouth.

While is not possible in this situation.

4 Reduced clauses

It is often possible to leave out subject + be after when and while:

While/When in Germany, he got to know a family of musicians. (=While/When he was in Germany …)

Practical English Usage, Michael Swan, OUP, pp. 73-74

While vs whilst

There is no difference in meaning between these two words. In British English whilst is considered to be a more formal and literary word than while.

Be Verb

The verb 'to be' is, in most cases, what we call a stative verb. These are verbs which refer to states rather than actions, and are hardly ever used in continuous (progressive) verb forms, i.e. present continuous, past continuous, future continuous, etc.

			I am sad at the moment (NOT I am being sad …)
			He was in the kitchen when the phone rang (NOT He was being in the kitchen …)
			I will be in Tenerife this time next week (NOT I will be being in Tenerife …)

However, some verbs that are usually stative can be used in continuous verb forms when they have certain meanings. Be is one of these verbs.

The following sentences are correct because be is used to describe an action and not a state:

			The children are being very naughty (= They are doing naughty things)
			He was being careless (= He was doing something carelessly)

Compare these to the following examples, where be is used to describe a state and not an action:

			I hope you are well. (NOT I hope you are being well).
			He was very happy when his friends arrived. (NOT He was being very happy …)

The other use of the word being is in passive verb forms. We usually make these forms by using tenses of the verb 'to be' followed by a past participle. The following forms are quite common:

Present progressive (am/are/is being + past participle)

The shop is closed because it is being renovated.

Past progressive (was/were being + past participle)

I knew that he was being dishonest.

Passive –ing forms (being + past participle)

They look forward to being invited. be + infinitive Michael Swan mentions the following uses of this structure: Plans and arrangements: to talk about plans and arrangements (in a formal way), especially when they are official. The President is to visit Nigeria next month. Fate: to talk about things which are/were 'hidden in the future'. I thought we were saying goodbye for ever. But we were to meet again, many years later. Pre-conditions: in if-clauses, when the main clause expresses something that must happen first if something else is to happen. We must hurry if we are to get there by lunchtime. Orders: to give orders. You can go to the party, but you are not to be back late. Be + passive infinitive: the passive infinitive (to be + past participle) is often used in notices and instructions. This cover is not to be removed. The medicine is to be taken three times a day.