Marginal costing can be defined as the technique in which only variable costs are charged to products while all fixed costs are written off against the profits in the period in which they arise. In other words it is based on important distinction between product costs and period costs, because period costs are related to the volume of output and period costs related to the period of time. So marginal costing regards only variable costs as product costs and fixed costs are treated as period costs.

Marginal costing is a valuable technique to the management for the following reasons –

1. It emphasizes the significance of key factors affecting the performance of the business in the planning and decision making areas which is of utmost importance for the management.

2. Marginal income figures facilitate relative appraisal of products, territories and other segments of business without having the results covered by the allocation of joint fixed costs.

3. Since marginal cost have large amount of variable component in it and variable costs are controllable costs, it helps the management to control the costs accordingly and hence a valuable technique.

4. Marginal costing integrates well with other aspects of management like planning, control, decision making etc…

5. The profits for a period is not affected by changes due to exclusion of fixed costs and hence other things being equal profits move in same direction as sales when company uses marginal costing.

6. Due to marginal costing management can more readily understand the assignment of costs to products because it involves variable cost and hence there is no complexity due to inclusion of fixed costs.

Hence from the above one can clearly see that marginal costing is an invaluable concept as far as management is concerned.

Related posts:

1. Different Categories of Costs
2. Techniques of Costing
3. Differences Between Job Costing and Process Costing