Advantages of Marginal Costing

Advantages of Marginal Costing

Advantages of marginal costing may be explained in terms of basic economic decision of profit maximization, decision making, profitability manipulation, and controlling of costs.

1.    Basic Economic Decision

First advantage of marginal costing is its offered explanation for continued production until marginal cost is less than marginal profit. Thus entity can maximize its profit or reduces losses till marginal cost equal to marginal revenue.

2.    Decision Making

Second advantage of marginal costing is its support for basic decision making. Marginal costing facilitates break even analyses, margin of safety analyses, desired profitability etc.

3.    Link between Sale Price, Volume, Cost

Third advantage of marginal costing is its linkage creation between sale price, variable cost and volume of sales. Marginal costing explains that how these factors contribute to the profitability of the organization.

4.    Profitability cannot be manipulated

Fourth advantage of marginal costing is its limited role in profitability manipulation. In marginal costing stock value cannot be easily manipulated, because fixed costs are not part of stock valuation. Therefore profitability cannot manipulate with stock valuation manipulation.

5.    Controlling of Costs

In marginal costing cost are divided into variable costs (controllable) and fixed cost (uncontrollable). This classification helps management to focus on the cost, which can be controlled.