Costing

Costing

Disadvantages of Marginal Costing

Introduction

Marginal costs are based on number of assumptions which might not hold true for all times. Keeping in view the significance of costing to managers engaged in decision making process, it is important for managers to analyze the limitations so that they might not get suffer from the error and invalidity in the long run. In the following discussion, the pros of marginal costing is mentioned below which will help managers to take in view different angles before taking a decision based on this costing method.

Discussion

One of the fundamental perquisites for application of marginal costing in any organization is that the managers should be able to distinguish the price structure at each level in to fixed and variable costs. However, it is just a short term model. In the long run, fixed costs as variable costs are covered with the revenue generated in the organization to determine the profitability.

Moreover, some cost is hybrid by nature which means it is semi variable which cannot be categorized either variable or fixed because the nature of cost varies greatly at different levels of production. This cost is prone to high level of inaccuracy and error which will invalidate the whole decision making criteria. A good example will be factory-machine hours. Factory machinery incurs fixed cost on monthly basis while variable cost varies with the production of output. In fact, even the variable cost may increase/decrease at high level of production (Chen, L, and S. Zhao, 2008).

Marginal costing implies pricing based on variable cost. It ignores the fixed cost incurred in the production of output. This will end up in wrong pricing of products when there is high fixed cost involved in the production process. Once again 'factory machine hours' is a good example. No production can be done ...