How is the concept of marginal costing practically applied?

How is the concept of marginal costing practically applied?

The concept of marginal costing is practically applied in the following situations:

- Evaluation of Performance : The evaluation of the performance of various departments or products can be evaluated with the help of marginal costing which is based on contribution generating capacity.

- Profit Planning : This technique through the calculation of P/V Ratio helps the management to plan the activities in such a way that the profit can be maximised.

- Fixation of Selling Price : The technique of marginal costing assists the management to fix the price in such a way so that prices fixed can cover at least the variable cost.

- Make or Buy decision : Marginal cost analysis helps the management in making or buying decision.

- Optimizing Product Mix : To maximise profits and increase sales volume it is necessary to decide an optimized mix or proportion in which various products of a company can be sold.

- Cost Control: Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs.

- Flexible Budget preparation: As the marginal costing particularly classifies costs as fixed and variable costs which facilitates the preparation of flexible budgets.