Historical Development of Marginal Costing

Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.

The concept of marginal utility grew out of attempts by economists to explain the determination of price. The term “marginal utility”, credited to the Austrian economist Friedrich von Wieser by Alfred Marshall. (Marshall, n.d.) Then, William Stanley Jevons first proposed the theory in “A General Mathematical Theory of Political Economy”, a paper presented in 1862 and published in 1863. He differed*…show more content…*

Advantage and disadvantage

In accounting system, as a method of tallying the costs it takes to produce goods, marginal costing has numerous obvious advantages and disadvantages.

1.Help to increase the scale of business & decision making.

Enlarging the operation scale is a indispensable way for manufactures when developing a company. Once fixed cost was determined, the more units produced, the more efficient that production becomes. Marginal costing is a very effective way of measuring whether economies of scale are saving the business capital. It perfectly avoids manipulation of short-term profit, overcoming the shortcoming of the full cost method, making significant contribution to short term production decisions. The following example will present this merit clearly:

One enterprise produce one kind of sandwich.

Fixed cost Variable cost unit

Produce process 400 2.2 1000

Selling process 100 0.3 600

Selling price is 4 pounds per unit.

By using marginal costing, it is easy to calculate the net profit is 400 pounds. However, the result will be 560 if we use full costing. Thus, under the marginal costing, profit is strongly related to sale quantity rather than produce quantity. The difference (160 pounds) between these two methods is from the inventory product’s fixed cost. It is apparent that fixed cost should be ignored when making produce (or input) quantity decision due to fixed cost is irrelevant to produce quantity. By avoiding arbitrary

Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.

The concept of marginal utility grew out of attempts by economists to explain the determination of price. The term “marginal utility”, credited to the Austrian economist Friedrich von Wieser by Alfred Marshall. (Marshall, n.d.) Then, William Stanley Jevons first proposed the theory in “A General Mathematical Theory of Political Economy”, a paper presented in 1862 and published in 1863. He differed

Advantage and disadvantage

In accounting system, as a method of tallying the costs it takes to produce goods, marginal costing has numerous obvious advantages and disadvantages.

1.Help to increase the scale of business & decision making.

Enlarging the operation scale is a indispensable way for manufactures when developing a company. Once fixed cost was determined, the more units produced, the more efficient that production becomes. Marginal costing is a very effective way of measuring whether economies of scale are saving the business capital. It perfectly avoids manipulation of short-term profit, overcoming the shortcoming of the full cost method, making significant contribution to short term production decisions. The following example will present this merit clearly:

One enterprise produce one kind of sandwich.

Fixed cost Variable cost unit

Produce process 400 2.2 1000

Selling process 100 0.3 600

Selling price is 4 pounds per unit.

By using marginal costing, it is easy to calculate the net profit is 400 pounds. However, the result will be 560 if we use full costing. Thus, under the marginal costing, profit is strongly related to sale quantity rather than produce quantity. The difference (160 pounds) between these two methods is from the inventory product’s fixed cost. It is apparent that fixed cost should be ignored when making produce (or input) quantity decision due to fixed cost is irrelevant to produce quantity. By avoiding arbitrary

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