Limitations of Marginal Costing

Some of the important limitations of marginal costing are as follows:

• Separation of all expenses into fixed and variable is practically difficult, because neither the variable cost is absolutely variable nor the fixed expenses are absolutely fixed. This problem of classification becomes more complicated with the presence of semi-variable and semi-fixed expenses.

• Time factor is not given due importance in marginal costing and all those expenses connected to time are excluded. Therefore, the pricing decision based on marginal costing is useful in short run but not in the long run. The long run decisions are based only on total cost and not on variable cost.

• Marginal cost understates the stock of finished goods and work-in-progress because of which the Balance Sheet does not exhibit a true and fair view.

• As the closing stock is valued at variable cost under marginal costing technique, the full loss on account of goods destroyed cannot be recovered from the insurance company.

• The other cost techniques such as budgetary control and standard costing can achieve better control when compared to marginal costing, as marginal costing deals with cost behavior but does not provide any standard for evaluation of performance.

• It fails to reveal the impact of change of manufacturing practice, for example, replacement of labor force by machine.

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