Marginal will not accept the valuation of stock and

Marginal Costing

Advantages

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1.     
As
the fixed costs are excluded in the cost of production there will be no
arbitrary apportionment of fixed costs, so marginal costing is a technique
which is simple and easy to understand.

2.     
The
results acquired from the marginal costing technique further helps in making
reliable managerial decisions.

3.     
This
technique helps in further distinguishing between the profits and the actual
cost incurred and thus the cost comparison becomes meaningful.

4.     
Adopting
this method highly increases the competition against other companies and since
the international market is highly competitive, the export prices are based on
the marginal cost of the product.

5.     
Marginal
costing mainly helps in short term profit planning and it also helps in eliminating
the balances left in overhead accounts, which helps to ascertain the accurate
overhead recover rate. It is a technique which highly helps in the fulfilment of
short term goals of an organization.

Disadvantages                                                                                 

1.     
In
marginal costing it is difficult to segregate the fixed costs and variable
costs from the total costs incurred because all costs incurred will be variable
in the long run and such classification may give misleading results.

2.     
As
the closing stock includes only variable costs excluding fixed costs, this
gives a contorted statement of profits to shareholders.

3.     
Marginal
costing is based on historical data and as there is an increase in the costs of
the materials and increase in the production every year, it may lead to
misleading statements and inaccurate representation of the company.

4.     
The
theory of distinguishing between the fixed costs and variable costs looks good
in the short run, however in the long run all the costs are variable and the
elimination of fixed costs makes the cost comparison difficult.

5.     
As
the stock does not show the true value, the taxation authorities will not accept
the valuation of stock and this also leads to deflation of profits. Marginal
cost pricing needs a good understanding of marginal cost techniques and the
accountants who are not well versed with this technique will not be capable of
explaining their use to the organization.

Comparison b/w Marginal
Costing and Unit Costing

Marginal cost shows the
increase or decrease in the total cost incurred in a business while producing
one more unit of that product or a service to a customer, whereas Unit cost shows
the total expenditure incurred by an organization to store, sell and produce
one unit of a particular service or a product.

Marginal Cost = Change in
Costs / Change in quantity

Unit Cost = Total cost /
Total number of units produced

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