Uses and Limitations of Marginal Costing

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Uses and Limitations of Marginal Costing

Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Uses and Limitations of Marginal Costing

  • According to research by CIMA the leading Management Institute
  • Traditional costing methods such as Absorption costing are still in widely used by manufacturing businesses throughout the world
  • There is are reasons for this:

Uses/Advantages of Absorption costing

  • Marginal costing is easy to understand there are none of the complexities of absorption costing for example calculating OARs etc
  • It is thus simple to operate
  • It can be combined with standard costing and budgetary control and thereby makes the control mechanism more effective
  • The problem of over or under absorption of overheads is avoided completely
  • A clear distinction of costs into fixed and variable elements makes the flexible budgetary control system easy and effective and thereby facilitates greater practical cost control
  • It helps profit planning through break-even charts and profit graphs
  • It is used to aid the decision making processes for example pricing decisions, make or buy decisions, creating a product mix as well as profit planning
  • Contribution per unit is constant unlike profit per unit which is used under absorption costing
  • Cost per unit is constant and does not change with production volumes

Limitations and drawbacks of marginal costing

  • Inventories are not valued in accordance with IAS2 as they do not include fixed costs
  • Does not ensure that all costs are recovered as each only contributes towards total fixed costs-this may ultimately be not enough
  • Pricing decisions cannot be based on contribution alone
  • Treating fixed costs as period costs can lead to inaccurate profit calculations and is against the matching principle
  • Profits might vary wildly especially in businesses that have seasonal sales.

To access more topics go the ZIMSEC Advanced Level Accounting page

To access more topics go to the Cambridge AS/A level page

By |2018-09-18T10:04:19+00:00September 18th, 2018|Cambridge AS A Level Accounting, Notes, ZIMSEC A Level Accounting|Comments Off on Uses and Limitations of Marginal Costing

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He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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