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