Advantages of Marginal Costing:
1. Simple and Easy: It is very simple to understand and easy to operate.
2. Helpful in Cost Control: Marginal costing divides total cost into fixed and variable cost. Marginal costing by concentrating all efforts on the variable costs can control total cost.
3. Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs.
4. Evaluation of Performance: The different products and divisions have different profit earning potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector.
5. Helpful in Decision Making: It is a technique of analysis and presentation of costs which help management in taking many managerial decisions such as make or buy decision, selling price decisions, Key or limiting factor, Selection of suitable Product mix etc.
6. Production Planning: It helps the management in Production planning. The effect of alternative production policy can be readily available and decision can be taken that would yield the maximum return to Business.
7. It removes the complexities of under-absorption of overheads.
8. The distinction between product cost and period cost helps easy understanding of marginal cost statements.
Disadvantages of Marginal Costing:
1. It is based on an unrealistic assumption that all costs can be segregated into fixed and variable costs. In the long term sales price, fixed cost and variable cost per unit may vary.
2. All costs are not divisible into fixed and variable. There are certain costs which are semi-variable in nature. The separation of costs into fixed and variable is difficult and sometimes gives misleading results.
3. Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from Stock Valuation affects profit, and true and fair view of financial affairs of an organization.
4. Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories.
5. It can correctly assess the profitability on a short-term basis only, but for long term it is not effective.
6. It does not provide any effective yardstick for evaluation of performance.
7. Contribution of marginal costing is not a foolproof indicator of profitability.
8. Marginal cost, if confused with total cost while fixing selling price may lead to a disaster.