Marginal Costing Question:
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What are the limitations of Marginal Costing?
Answer:
The limitations of Marginal Costing:
- The classification of total costs into fixed and variable cost is difficult.
- In this technique fixed costs are totally eliminated for the valuation of inventory of finished and semi-finished goods. Such elimination affects the profitability adversely.
- In marginal costing historical data is used while management decisions are related to future events.
- It does not provide any standard for the evaluation of performance.
- Selling price fixed on the basis of marginal cost will be useful only for short period of time.
- Assessment of profitability on the marginal cost base can be used only in the short period of time.
- The classification of total costs into fixed and variable cost is difficult.
- In this technique fixed costs are totally eliminated for the valuation of inventory of finished and semi-finished goods. Such elimination affects the profitability adversely.
- In marginal costing historical data is used while management decisions are related to future events.
- It does not provide any standard for the evaluation of performance.
- Selling price fixed on the basis of marginal cost will be useful only for short period of time.
- Assessment of profitability on the marginal cost base can be used only in the short period of time.
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