Advantages and Disadvantages of Marginal Costing

Marginal costing can be defined as an accounting technique whereby small increase or decrease in output result in change in total cost. For example suppose it takes $1000 to produce 1000 units and next 1 unit is produced at $2 then marginal cost will be $2 for that unit. Here are some of the advantages of marginal costing technique –

1. It is simple to understand and easy to calculate and hence anybody can understand it easily.

2. It helps in decision making like for calculation of profitability, for determining selling price of the product, to decide whether to buy or make a product, whether to utilize the idle capacity available with the company.

3. It helps in cost control by showing variable and fixed cost separately.

Disadvantages of marginal costing

1. Under marginal costing all costs are classified as either fixed or variable and it ignores the semi variable costs.

2. It is not suitable for companies which have high fixed cost per unit because it takes into account only variable cost per unit.

3. It is suitable only where production is of uniform size and shape and hence it is of limited use for companies which produce goods of different shapes and sizes.

Hence companies should take into account above factors before deciding whether they want to adopt marginal costing or not.