Advantages of Marginal Costing Technique

Advantages

1.      Marginal costing is simple to understand.

2.      By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided.

3.      It prevents the illogical carry forward in stock valuation of some proportion of current year’s fixed overhead.

4.      The effects of alternative sales or production policies can be more readily available and assessed, and decisions taken would yield the maximum return to business.

5.      It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate.

6.      Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost. It is useful to various levels of management.

7.      It helps in short-term profit planning by breakeven and profitability analysis, both in terms of quantity and graphs. Comparative profitability and performance between two or more products and divisions can easily be assessed and brought to the notice of management for decision making.