Marginal Costing

Tags

finance

A [see page 16, markup-calculation] process which takes into account the direct-cost and Variable Costs.

See example [see page 25, here] and [see page 17, here].

Marginal costing judges a project based on its contribution-margin. A project will be accepted if it makes a +ve contribution (contributes to reducing fixed costs or produces a profit for the business).

If the contribution margin of a special-order produces a net-positive profit, it should be accepted. You can see a comparison of the marginal-costing to Absorption Costing approach [see page 23, here].

Advantages:

• Avoids the problem of uncertain cost information related to fixed cost-per-unit prices.
• Helpful in pricing special orders or when excess capacity exists.

Disadvantages:

• Managers may set the price too low and fail to cover fixed costs.