Marginal costing: “Explain, “Marginal costing is a cost presentation and cost analysis technique.” What are the limitations and merits of marginal costing?(500 words)

Introduction (100 words)
- Marginal costing means the method to detect the level of profit changes due to various factors, including the volume, cost and selling price. Thus marginal costing helps in determining the business decisions.
- Indicate that marginal costing presents the variable and fixed costs on separate sides and multilevel absorption costing doesn’t require complexity.

Expound on the idea (150 words).
- As for marginal costing, fixed costs would be an overhead for the period, while variable costs are the only ones used in inventory valuation and the calculation of the cost of goods sold.
- It is a tool for a decision maker while he may decide to add a new product, make a thing by himself, or what is most common – define super profit on a new market.

Merits (100 words)
- Under absorption costing, there is a relatively easy way to account.
- Useful as they make decisions to achieve maximum profits.
- Do not get jumbles up with valuation of inventory and its effect on profits.

Limitations (100 words)
- Since these costs are allocated to items, rather than being associated to particular products, unit costs are understated.
- Inventory valuation is not according to accounting standards for the inventory is not in as it appears in the books of accounts.
- The earnings figures which are distorted, as compared to the absorption costing, are not considered valid for appropriate external reporting.

Conclusion (50 words)
- Inventory valuation and external reporting are some areas in which marginal costing cannot be used because of its weak spot. Apart from that, marginal costing is helpful in making decisions.