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Accounting For Managers - Management Accounting-Marginal Costing

Benefits Of Marginal Costing

   Posted On :  02.05.2018 11:12 pm

The technique of marginal costing is of immense use to the management in taking various decisions, as explained below:

Benefits Of Marginal Costing
 
 
The technique of marginal costing is of immense use to the management in taking various decisions, as explained below:
 

1. How Much To Produce?

 
 
Marginal costing helps in finding out the level of output which is most profitable for running a concern. This, in turn, helps in utilising plant capacity in full, and realise maximum profits. By determining the most profitable relationships between cost, price and volume, marginal costing helps a business determine most competitive prices for its products.
 

2. What To Produce?

 
 
By applying marginal costing techniques, the most suitable production line could be determined. The profitability of various products can be compared and those products which languish behind and which do not seem to be feasible (in view of their inability to recover marginal costs), may be eliminated from the production line by using marginal costing. It, thus, helps in selecting an optimum mix of products, keeping the capacity and resource constraints in mind. It will also serve as a guide in arriving at the price for new products.
 

3. Whether To Produce Or Procure?

 
 
The marginal cost of producing an article inside the factory serves as a useful guide while arriving at make or buy decisions. The costs of manufacturing can be compared with the costs of buying outside and a suitable decision can be arrived at easily.
 

4. How To Produce?

 
 
In case a particular product can be produced by two or more methods, ascertaining the marginal cost of producing the product by each method will help in deciding as to which method should be allowed. The same is true in case of decisions to use machine power in place of manual labour.
 

5. When To Produce?

 
 
In periods of trade depression, marginal costing helps in deciding whether production in the plants should be suspended temporarily or continued in spite of low demand for the firm’s products.
 

6. At What Cost To Produce?

 
 Marginal costing helps in determining the no profit- no-loss point. The efficiency and economy of various products, plants, departments can also be determined. This helps in profit planning as well as cost control.


Tags : Accounting For Managers - Management Accounting-Marginal Costing
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