What is Marginal Costing? What are its features? What are the basic assumptions made by Marginal Costing?
Marginal Costing is ascertainment of the marginal cost which varies directly with the volume of production by differentiating between fixed costs and variable costs and finally ascertaining its effect on profit.The basic assumptions made by marginal costing are following:
- Total variable cost is directly proportion to the level of activity. However, variable cost per unit remains constant at all the levels of activities.
- Per unit selling price remains constant at all levels of activities.
- All the items produced by the organisation are sold off.
Features of Marginal costing:
- It is a method of recoding costs and reporting profits.
- It involves ascertaining marginal costs which is the difference of fixed cost and variable cost.
- The operating costs are differentiated into fixed costs and variable costs. Semi variable costs are also divided in the individual components of fixed cost and variable cost.
- Fixed costs which remain constant regardless of the volume of production do not find place in the product cost determination and inventory valuation.
- Fixed costs are treated as period charge and are written off to the profit and loss account in the period incurred.
- Only variable costs are taken into consideration while computing the product cost.
- Prices of products are based on variable cost only.
- Marginal contribution decides the profitability of the products.
