Important factors to be considered in marginal costing decisions
In all recommendations of marginal Costing decisions, the following factors are to be considered:
Contribution: Whether the product or production line in question makes a contribution.
Specific fixed cost, if any: Where a choice is to be made between two course of action, the additional fixed overhead, if any, should be taken into account.
CVP relationship: The effect of increase in volume on profits, and the rate of earning, additional profits, should be analysed.
Incremental contribution: Where additional quantities can be sold only at reduced prices, incremental contribution will be more effective in decision making, as it takes into account the additional sale quantity and additional contribution per unit.
Capacity: Whether acceptance of the incremental order, or additional product line is within the firm’s capacity or whether key factor comes into play, should be analysed.
Non cost factors: Non cost factors should also be considered, wherever applicable.