Concept of marginal costing

Question

In what condition the concept of marginal costing basically applied?

Answer 1

The concept of marginal costing is basically applied in the subsequent condition:

- Estimation of Performance: The Estimation of the performance of different departments or products can be measured with the aid of marginal costing that is depends on contribution generating capacity.

- Profit Planning: This method throughout the computation of P/V Ratio aids the management to plan the activities in such a manner that the profit can be maximized.

- Fixation of Selling Price: The method of marginal costing aids the management to fix the price in such a manner so that prices fixed can cover no less than the variable cost.

- Make or Buy decision: Marginal cost analysis aids the management in buying or making decision.

- Optimizing Product Mix: To maximize profits and raise sales volume it is essential to decide an optimized mix or proportion in that different product of a company can be sold.

- Cost Control: Marginal Costing is a method of cost categorization and cost arrangement that facilitate the management to focus on the controllable costs.

- Flexible Budget preparation: As the marginal costing mainly categorizes costs as fixed and variable costs that provides the preparation of flexible budgets.