Advantages and Disadvantages of Marginal Costing

Absorption costing and marginal costing are different from each other as explained in the article “Differences between absorption costing and marginal costing”, but both have their own advantages and disadvantages.

Advantages and disadvantages of marginal costing are highlighted below:

Advantages of marginal costing

  • Marginal costing provides useful information for decision making.
  • Marginal costing is less complex than absorption costing. It is a simple task to account for fixed overheads by simply charging the fixed overheads to income statement in the period in which they are incurred.
  • No need to calculate over/ under absorption of overheads.
  • Discrete information regarding variable costs and fixed costs is available which can be useful in controlling the activities.

Disadvantages of marginal costing

  • Marginal costing cannot be used externally for financial reporting as in marginal costing, inventory is not valued as per the requirement of financial reporting standards.