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It Is A Costing Technique Where Only Variable Cost or Direct Cost Will Be Charged To The Cost Unit Produced
It Is A Costing Technique Where Only Variable Cost or Direct Cost Will Be Charged To The Cost Unit Produced
Salient Points:
In marginal costing, fixed costs are never charged to production. They are
treated as period charge and is written off to the profit and loss account in
the period incurred;
All operating costs are differentiated into fixed and variable costs;
Fixed cost treated as period cost and written off to the profit and loss
account
Stock valuations are not distorted with present years fixed costs;
The effect of production and sales policies is more clearly seen and
understood.
Marginal cost has its limitation since it makes use of historical data while
decisions by management relates to future events;
Stock valuation under this type of costing is not accepted by the Inland
Revenue as it’s ignore the fixed cost element;
It fails to recognize that in the long run, fixed costs may become variable;
It’s not a good costing technique in the long run for pricing decision
as it ignores fixed cost. In the long run, management must consider the
total costs not only the variable portion;