What Are Limitations Of Marginal Costing?
It is difficult to classify costs exactly into fixed and variable. Most of the expenses are neither totally variable nor wholly fixed. Contribution itself is not a guide unless it is linked with the key factor Sales staff may mistake marginal cost for total cost and sell at a price, which will result in loss or low profits. Hence, sales staff should be cautioned while giving marginal cost. Overheads of fixed nature cannot altogether be excluded particularly in large contracts while valuing the work-in-progress. In order to show the correct position fixed over heads should be included in work-in-progress. Some of the assumptions regarding the behavior of various costs etc., are not necessarily true in a realistic situation. For example, the assumption that fixed cost will remain static throughout is not correct.
