Marginal costing has the following limitations:
Limitations Of Marginal Costing
Marginal
costing has the following limitations: 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 insurance
company.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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