marginal costing


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Marginal Cost

The total cost to a company to produce one more unit of a product. The marginal cost varies according to how many more or fewer units a company wishes to produce. Increasing production may increase or decrease the marginal cost, because the marginal cost includes all costs such as labor, materials, and the cost of infrastructure. For example, if a widget manufacturer increases the number of widgets it produces, it may need to buy more material, but the costs of labor and factory maintenance remain the same, and are spread out over a greater number of widgets. This may reduce the marginal cost. On the other hand, if the manufacturer hires more workers and builds another factory, it will likely increase the marginal cost. It is also known as the incremental cost.
Marginal costingclick for a larger image
Fig. 55 Marginal costing. A typical example.

marginal costing

a system of product COSTING which assigns variable materials and labour costs to units of product manufactured but which does not assign fixed OVERHEAD costs to products. Fig. 55 shows an illustration of marginal costing.

With marginal costing, work in progress and finished goods stocks are valued at direct materials and direct labour costs only, and fixed overhead costs are charged as a single block against revenues in the period when. they are incurred. By contrast, with ABSORPTION COSTING fixed overhead costs are included in the value of work in progress and finished goods stock.

See CONTRIBUTION, BREAKEVEN.

References in periodicals archive ?
Marginal Costing is based on the use of resource drivers for cost planning, cost control and analysis, and cost assignment.
In this sense, then, the relationship between Marginal Costing and Process Costing/ABC as cost allocation models is not only one of competition but also complementary.
These differences include a different definition of output measures in the form of process/activity cost drivers that are not necessarily volume-based and different cost categories compared to Marginal Costing.
In Process Costing/ABC, the processes are essentially an additional level between cost center accounting and job order cost accounting in Marginal Costing.
In conclusion, we have seen that process costing and Marginal Costing are fully complementary approaches to cost management.
6 PREREQUISITES FOR EFFECTIVE AND EFFICIENT USE OF MARGINAL COSTING
An empirical study in Germany found that Marginal Costing is used by 49% of small companies, 65% of mid-sized companies, and 61% of large companies and that 42% of all companies use marginal costs in short-term operational accounting.
7) Robust, integrated enterprise resource planning (ERP)-based management accounting systems (running parallel to the G/L) were in use by the mid-1980s to support marginal costing.
In Germany, gauging by the latest adoption rate of marginal costing, the KISS principle found few adopters.
Marginal costing has immense credibility, and ABC already has been adapted--to Prozesskostenrechnung (process costing)--to integrate better with marginal costing.
Moreover, marginal costing provides superior decision-support information for the types of decisions that TOC purports to enable.
Despite a sophisticated attempt in Germany to dethrone marginal costing, it has survived the onslaught of the new thinkers.