Marginal (variable) costing

Last updated: 29.03.2016

Marginal costing is a type of costing method under which only variable costs are included to the value of the product (or job, contract, batch, process, etc.).

Therefore, fixed costs are not allocated to the product and are expensed.  

It is also known as variable costing method.

 

This costing method is not acceptable for inventory valuation either under IAS 2 or US GAAP but it is important for decision-making as it highlights only the changes of costs that result from certain decision. 

 

By deducting variable costs from the revenues is obtained CONTRIBUTION.

 

Advantages of marginal costing compared to absorption costing

  • Much simpler method, easier to understand and easily demonstrated by break-even graphs
  • Provides meaningful information for decision making as it:
    • is consistent with the concept of contribution (contribution per unit remains unchanged if production volumes change)
    • provides less opportunities to manipulate profit by changes in inventory levels
    • does not result into unabsorbed overheads

 

Marginal costing method is useful for

  • decisions, where you need to choose one of more possible production alternatives
  • short-term decisions, because the entity needs to cover its fixed costs in the long-term

 

Disadvantages of marginal costing compared to absorption costing

  • Not acceptable for inventory valuation under IFRS or US GAAP
  • Absorption costing (or ABC)  can also help to understand costs in greater detail as marginal costing method does not analyze fixed costs at all
  • In practice, it may be difficult to distinguish between variable and fixed costs or the result of doing so may be misleading
  • Is less appropriate for longer-term planning as fixed costs may vary with production volume over the longer time

 

More about comparison of throughput costing, variable costing, absorption costing and Activity Based Costing (ABC) methods here.



Pomohl Vám tento článek? Ohodnoťte jej prosím.

1 = nejhorší, 10 = nejlepší

1 2 3 4 5 6 7 8 9 10
Komentář
Tento web používá k poskytování služeb, personalizaci reklam a analýze návštěvnosti soubory cookie. Používáním tohoto webu s tím souhlasíte. Další informace