What Are The Limitations Of Marginal Costing?

1.	What Are The Limitations Of Marginal Costing?
Answer» The classification of total cost as variable cost and fixed cost is difficult as no cost can be completely variable or completely fixed. Fixed costs are ELIMINATED for the valuation of inventory of finished goods and semi-finished goods in spite of the fact that they might have been actually INCURRED. It does not PROVIDE any standard for the evaluation of performance. Fixation of selling price on marginal cost basis may be useful for SHORT term only and may be dangerous in the long run. It does not consider the fixed overheads. It can be used for assessment of PROFITABILITY only in the short run.

Answer»

The classification of total cost as variable cost and fixed cost is difficult as no cost can be completely variable or completely fixed.
Fixed costs are ELIMINATED for the valuation of inventory of finished goods and semi-finished goods in spite of the fact that they might have been actually INCURRED.
It does not PROVIDE any standard for the evaluation of performance.
Fixation of selling price on marginal cost basis may be useful for SHORT term only and may be dangerous in the long run.
It does not consider the fixed overheads.
It can be used for assessment of PROFITABILITY only in the short run.

Discussion