Marginal Costing

Question 1

What are the advantages of MC costing?

Answer 1

1) For volatile businesses it is better as it relies on the concept of contribution, not profit.
2) As fixed cost is excluded the valuation is more realistic.
3) Useful for make or buy decisions.
4) No under/over absorption to calculate.

Question 2

What are the disadvantages of MC costing?

Answer 2

1) Unrealistic assumptions that sales price and variable cost are constant.
2) Semi-variable or stepped costs are not considered.
3) For businesses with high fixed costs this will be inaccurate.