Need and Features of Marginal Costing

Need for Marginal Costing

Let us see why marginal costing is required:

  1. Variable cost per unit remains constant; any increase or decrease in production changes the total cost of output.
  2. Total fixed cost remains unchanged up to a certain level of production and does not vary with increase or decrease in production. It means the fixed cost remains constant in terms of total cost.
  3. Fixed expenses exclude from the total cost in marginal costing technique and provide us the same cost per unit up to a certain level of production.

Features of Marginal Costing

 

  1. Marginal costing is used to know the impact of variable cost on the volume of production or output.
  2. Break-even analysis is an integral and important part of marginal costing.
  3. Contribution of each product or department is a foundation to know the profitability of the product or department.
  4. Addition of variable cost and profit to contribution is equal to selling price.
  5. Marginal costing is the base of valuation of stock of finished product and work in progress.
  6. Fixed cost is recovered from contribution and variable cost is charged to production.
  7. Costs are classified on the basis of fixed and variable costs only. Semi-fixed prices are also converted either as fixed cost or as variable cost.
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