MARGINAL COSTING The Limitations of Marginal Costing and Contribution Analysis

The Limitation of Marginal Costing and Contribution Analysis

In finance and accounting marginal costing and contribution analysis holds great importance for managers for making decisions regarding product pricing. There are times when a business activity needs changes while it is still ongoing to enable the company to still hit its goals. Sometimes, the changes are still being proposed and ideas are still being brainstormed in meetings. These changes are important because things may not go well in a business venture. In the course of activity of any given business, the expenses that are based upon how the business is going are called variable costs. When the ideas and other proposed alternatives in a necessary decision is being collected and presented, this process is called full cost accounting (Zambon and Zan, 2000, p. 99-822).

The marginal cost is not opposed to full cost or partial cost. Indeed, it is not defined by its content but by its method of calculation. Marginal cost is suitable for most management decisions to the extent that they are only changes, by step, made ??in a previous situation: accept a new order, launch a new series in production, acquire new hardware, etc. It is especially useful to establish a pricing policy type segmented yield management. This is the marginal cost reasoning explains the significant discounts that can be obtained on a ticket or a hotel night in low season: as the hotel or plane is not full, the marginal cost of an additional client is minimal (Kaplan, 2008, p. 66). The Manager, who seeks to provide useful information to decision-making must be able to determine what cost calculation before starting calculations. The cost is not calculated only be accurate but also relevant is to say, adapted to the management problem posed. For this purpose, it must evaluate with the most reliability possible influence on the outcome of the business of the decision. Thus, the relevant cost must include all charges affected the decision to make and only those charges. The system variable costing considers fixed production costs as period expenses, while costing the distributed absorber units produced (Brock et al, 2007, p. 100).

The variable has the same costing assumptions or limitations that the cost model - volume - profit including a perfect split between variable and fixed costs, linearity in the behaviour of costs, the sale price, fixed costs within ...