Marginal costing techniques Essay

The approach of a crossroad under peripheral costing or variable costing includes only the variable be of making the overlap. The variable be include direct material, direct dig and variable overheads. Variable costs per unit approximate the marginal cost of making another unit of a increase. Selling price subtraction variable costs adds up to contribution. Contribution is the amount of money uncommitted to cover the fixed costs and afterwards to contribute to profit. The fixed costs are treated as period costs and are expensed in the period incurred.Marginal costing can be used to back up in decision making in the following circumstances adoption of a special order, dropping a intersection point, make or secure decision and to choose which product (mix) to produce when a limiting mover (resource) exists. The technique of marginal costing mainly concentrates on financial factors, for face the companys objective to maximise profit or to take in wealth. But other non-f inancial or commercial implications with long term section are largely ignored. If a company decides whether it should drop a product or not, it is necessary to consider commercial factors. If it stops producing a product because of its profitability, it might upset customers who have bought this product over years. And it may dislodge that they start profaneing their whole products from competitors. A company should not destine immediately about dropping a product when the demand is as well as low, since it is footling term commending to let thousands of customers go away.It should rather think about exceeding the demand. Further on, the product to be dropped may be a complementary one to another product made by the company. The problems of scarse resources can be compared with those of dropping a product. If an enterprise decides to make an optimum product mix (=profit maximising product mix), it might be in the position of not having enough resources to make a product with a lower contribution. The same effects of dropping a product could be a consequence. The acceptance of an order might depend on non-financial factors as well. The firm should consider if it could sell the products itself under another (low cost) label. what is more a company must pay attention to its price in the primary market because the orderer might offer the product each for a higher or lower price. Make or buy decisions are difficult because outsourcing always jeopardizes the jobs of those currently working for thecompany and the smell of the job to be done. The firms image and thereby its sales are compose in danger, if it makes frivolous redundancies. Moreover, the company has to make sure that it gets the same whole tone of output for less money to justify the outsourcing.In my opinion it is uncoiled that marginal costing ignores other relevant commercial factors. The contribution of a product on its own should not be decisive and is short term thinking. A company has to pay attention to customers, public and competitors as well. A long term strategy including financial and non-financial factors should be realised to ensure a profitable and sustainable performance.