Marginal cost is the increase in the total cost when the total quantity produced increases by one unit. That is, it is the cost of producing one more unit of a good. Generally, marginal cost at each level of production is the additional costs required to produce the next unit. For example, if producing additional computers requires building a new factory, the marginal cost of the extra computers includes the cost of the new factory.
In practice, this analysis is divided into short and long-run cases, so that over the longest run, all costs become marginal. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are considered fixed.
Merits of Marginal Costing:
• Prevents Illogical Carry forwards: It prevents the unreasonable carry-forwards of overheads in stock-valuation of some proportion of current years fixed overhead.
• Accurate Overhead Recovery Rate: It eliminates large balances left in overhead control accounts, which make it difficult to ascertain an accurate overhead recovery rate.
• Maximum return to the business: The effects of alternative sales or production policies can be easily evaluated and assessed enabling optimum decision making
• Cost Control: Marginal costing greatly facilitates practical cost. By avoiding arbitrary fixed overhead allocation, efforts can be focused on maintaining a uniform and consistent marginal cost useful to the various levels of management.
• Simplicity: Marginal Costing can be understood at various levels due to its simplicity; it can be combined with other forms of costing, such as, budgetary costing, standard costing without much difficulty.
• Elimination of varying charge per unit: In marginal Costing since fixed overheads are not charged to the cost of production, the cost of production is fixed and not varying.
• Short-Term Profit Planning: It helps in