Define marginal costing and give its limitations.

Management Accounting Block Revision Mock Exams

Marginal costing refers to a method of costing products (goods and services) in which the cost per unit is only the variable costs. Thus, the current production and closing stocks are valued at their variable costs only. The manufacturing fixed overheads are written off or expensed wholly in the period in which they are incurred.
Limitations of Marginal costing:

These arise from the assumptions of marginal costing which are:

Costs can be classified as either fixed or variable. Marginal costing does not therefore consider the mixed costs.
Selling price is assumed constant: in reality, the selling price per unit decreases with increased sales due to the effect of quantity discount.
Fixed costs are assumed to remain fixed within the relevant range; in reality, stepped costs functions exist i.e. fixed costs rise to a higher level when certain critical production levels are achieved.
Constant sales mix: or single product is assumed; in reality, organizations produce many products and also change their product mix when circumstances dictate.
Variable costs are assumed to be constant: in reality, this is not true due to decreasing costs per unit due to the effect of large scale production.

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