IMPORTANCE OF MARGINAL COSTING

 Marginal costing is a technique of assigning the cost to the product in which only the variable costs are considered in calculating the cost of the product, while fixed costs are charged against the revenue of the period.

The revenue arising from the excess of sales over variable costs is technically known as Contribution under Marginal Costing

The following are the importance or usefulness of marginal costing

Helps in determining the volume of production

Marginal Costing helps in determining the level of output that is most profitable for a running concern.

The production capacity, therefore, can be utilized to the maximum possible extent.

It helps in determining the most profitable relationship between cost, price and volume in the business which helps the management in fixing the best-selling price for its products.

Thus, maximization of profit can be achieved.

Helps in selecting production lines

The technique of Marginal Costing helps in determining the most profitable production line by comparing the profitability of different products.

Certain products or activities may turn out to be unprofitable with the passage of time.

Production of such products can be discontinued while production of those products which are more profitable can be taken up. It can help in the introduction of new products and work as a good guide for deciding the optimum mix of products keeping in mind the available capacity and resources.

Helps in deciding whether to produce or procure

The decision whether a particular product should be manufactured in the factory or procured from an outside source can be taken by comparing the price at which it can be had from outside.

In case the procurement price is lower than the marginal cost of production, it will be advisable to procure the product from outside rather than manufacture it in the factory.

Helps in deciding the method of manufacturing

In case a product can be manufactured by two or more methods, ascertaining the marginal cost of manufacturing the product by each method will be helpful in deciding as to which method should be adopted.

Helps in deciding whether to shut down or continue

Marginal Costing, particularly in periods of trade depression, helps in deciding whether the product in the plant should be suspended temporarily. or continued in spite of low demand for the firm's products.

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