Page 1 of 2

The use of marginal costing techniques for managerial decision ma...

Continues for 1 more pages »
Read full document

The use of marginal costing techniques for managerial decision making ignores important commercial factors. Discuss this statement including relevant examples to support your argument.

  • By
  • Jan. 9, 2004
  • 512 Words
  • 21392 Views
Page 1 of 2
The cost of a product under marginal costing or variable costing includes only the variable costs of making the product. The variable costs include direct material, direct labour and variable overheads. Variable costs per unit approximate the marginal cost of making another unit of a product. Selling price minus variable costs adds up to contribution. Contribution is the amount of money available to cover the fixed costs and afterwards to contribute to profit. The fixed costs are treated as period costs and are expensed in the period incurred.

Marginal costing can be used to assist in decision making in the following circumstances: acceptance of a special order, dropping a product, make or buy decision and to choose which product (mix) to produce when a limiting factor (resource) exists. The technique of marginal costing mainly concentrates on financial factors, for instance the company's objective to maximise profit or to create wealth. But other non-financial or commercial implications with long term character are largely ignored. If a company decides whether it should drop a product or not, it is necessary to consider commercial factors. If it stops producing a product because of its profitability, it might upset customers who have bought this product over years. And it may happen that they start buying their whole products from competitors. A company should not think immediately about dropping a product when the demand is too low, since it is short term thinking to let thousands of customers go away. It should rather think about exceeding the demand. Further on, the product to be dropped may be a complementary one to another product made by the company. The problems of scarse resources can be compared with those of dropping a product. If an enterprise decides to make an optimum product mix (=profit maximising product mix), it might be in the position of not having enough resources to make a product with a lower contribution. The same effects of dropping a...