Characteristics of Marginal Costing

Characteristics of Marginal Costing

1.    Fixed & Variable Cost Distinction

Marginal costing separates variable cost and fixed cost. This separation is fundamental assumption of marginal costing. In marginal costing it is considered that marginal cost has primary role, while fixed cost has limited role.

2.    Variable Cost has Primary Role

Marginal costing considers variable cost in details due to its primary role in the profitability. In marginal costing profitability can be improved by improving contribution i.e. Sales- variable costs. Therefore in marginal costing focus remain on variable cost.

3.    Fixed Cost is period Cost

Marginal costing believes that fixed cost have limited or no role in the production. Therefore fixed cost is treated as period costs.

4.    Stock Valuation at variable cost

In marginal costing stock is value at variable cost only. This is due to the fact that fixed cost is period cost and therefore need not to be included in the stock valuation. In marginal costing stock valuation differ from absorption costing, which also take into account fixed cost in stock valuation.

5.    Direct Linkage of cost & Activity

Marginal costing establishes direct linkage between sales price, variable costs and sales volume. Due to this direct linkage, marginal costing is widely used by the management   in decision making.

6.    Basic Decision making tool

Marginal costing serves as basic decision making tool for the management. Marginal costing facilitates to calculate break even profit, desired profitability sales volume. Marginal costing also helps in risk assessment i.e. margin of safety analyses.