Need for Marginal Costing
Let us see why marginal costing is required:
- Variable cost per unit remains constant; any increase or decrease in production changes the total cost of output.
- 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.
- 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
- Marginal costing is used to know the impact of variable cost on the volume of production or output.
- Break-even analysis is an integral and important part of marginal costing.
- Contribution of each product or department is a foundation to know the profitability of the product or department.
- Addition of variable cost and profit to contribution is equal to selling price.
- Marginal costing is the base of valuation of stock of finished product and work in progress.
- Fixed cost is recovered from contribution and variable cost is charged to production.
- 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.