CHARACTERISTICS OF MARGINAL COSTING

CHARACTERISTICS OF MARGINAL COSTING

The technique of marginal costing is based on the distinction between product costs and period costs. Only the variables costs are regarded as the costs of the products while the fixed costs are treated as period costs which will be incurred during the period regardless of the volume of output. The main characteristics of marginal costing are as follows:

1. All elements of cost are classified into fixed and variable components. Semi-varia- ble costs are also analyzed into fixed and variable elements.

2. The marginal or variable costs (as direct material, direct labour and variable facto- ry overheads) are treated as the cost of product.

3. Under marginal costing, the value of finished goods and work–in–progress is also comprised only of marginal costs. Variable selling and distribution are excluded for valuing these inventories. Fixed costs are not considered for valuation of clos- ing stock of finished goods and closing WIP.

4. Fixed costs are treated as period costs and are charged to profit and loss account for the period for which they are incurred.

5. Prices are determined with reference to marginal costs and contribution margin.

6. Profitability of departments and products is determined with reference to their contribution margin.