Accounting For Managers - Management Accounting-Marginal Costing
Limitations Of Marginal Costing
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Marginal costing has the following limitations:
Limitations Of Marginal Costing
Marginal
costing has the following limitations:
In marginal costing, costs are segregated into Fixed and variable. In actual practice, this classification scheme proves to be Superfluous in that, certain costs may be partly fixed and partly variable and Certain other costs may have no relation to volume of output or even with the time. In short, the categorisation of costs into fixed and variable elements is a difficult and tedious job.
the marginal costing technique cannot be applied in industries where large stocks in the form of work-in-progress (job and contracting firms) are maintained.
under marginal costing, fixed costs are not included in the value of finished goods and work in progress. As fixed costs are also incurred, these should form part of the cost of the product. By eliminating fixed costs from finished stock and work-in-progress, marginal costing techniques present stocks at less than their true value. Valuing stocks at marginal cost is objectionable because of other reasons also:
1. In case of loss by fire, full loss cannot be recovered from the
2. Profits will be lower than that shown under absorption costing andhence may be objected to by tax authorities.
3. Circulating assets will be understated in the balance sheet.
In marginal costing, sales prices are arrived at on the basis of contribution alone. This is an objectionable practice. For example, in the long run, the selling price should not be fixed on the basis of contribution alone as it may result in losses or low profits. Other important factors such as fixed costs, capital employed should also be taken into account while fixing selling prices. Further, it is also not correct to lay more stress on selling function, as is done in marginal costing, and relegate production function to the backgroud.
The utility of marginal costing is limited to short-run profit planning and decision-making. For decisions of far-reaching importance, one is interested in special purpose cost rather than variable cost. Important decisions on several occasions, depend on non-cost considerations also, which are thoroughly discounted in marginal costing.
In view of these limitations, marginal costing needs to be applied with necessary care and caution. Fruitful results will emerge only when management tries to apply the technique in combination with other useful techniques such as budgetary control and standard costing.
1.difficulty in classification:
In marginal costing, costs are segregated into Fixed and variable. In actual practice, this classification scheme proves to be Superfluous in that, certain costs may be partly fixed and partly variable and Certain other costs may have no relation to volume of output or even with the time. In short, the categorisation of costs into fixed and variable elements is a difficult and tedious job.
2.Difficulty In Application:
the marginal costing technique cannot be applied in industries where large stocks in the form of work-in-progress (job and contracting firms) are maintained.
3.Defective Inventory Valuation:
under marginal costing, fixed costs are not included in the value of finished goods and work in progress. As fixed costs are also incurred, these should form part of the cost of the product. By eliminating fixed costs from finished stock and work-in-progress, marginal costing techniques present stocks at less than their true value. Valuing stocks at marginal cost is objectionable because of other reasons also:
1. In case of loss by fire, full loss cannot be recovered from the
2. Profits will be lower than that shown under absorption costing andhence may be objected to by tax authorities.
3. Circulating assets will be understated in the balance sheet.
4.Wrong Basis For Pricing:
In marginal costing, sales prices are arrived at on the basis of contribution alone. This is an objectionable practice. For example, in the long run, the selling price should not be fixed on the basis of contribution alone as it may result in losses or low profits. Other important factors such as fixed costs, capital employed should also be taken into account while fixing selling prices. Further, it is also not correct to lay more stress on selling function, as is done in marginal costing, and relegate production function to the backgroud.
5.Limited Scope:
The utility of marginal costing is limited to short-run profit planning and decision-making. For decisions of far-reaching importance, one is interested in special purpose cost rather than variable cost. Important decisions on several occasions, depend on non-cost considerations also, which are thoroughly discounted in marginal costing.
In view of these limitations, marginal costing needs to be applied with necessary care and caution. Fruitful results will emerge only when management tries to apply the technique in combination with other useful techniques such as budgetary control and standard costing.
Tags : Accounting For Managers - Management Accounting-Marginal Costing
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