Marginal costing

Marginal cost is the change in the total cost when the quantity produced is incremented by one. Marginal cost includes all of the costs that vary with the level of production. For example, if a company needs to build a new factory in order to produce more goods, the cost of building the factory is a marginal cost.

The concept is used to determine the optimum production quantity for a company, where it costs the least amount to produce additional units. It is calculated by taking the total change in the cost of producing more goods and dividing that by the change in the number of goods produced.

Marginal costs can help firms determine the level at which it achieves economies of scale. It is useful in profit planning; it is helpful to determine profitability at different level of production and sale.

It helps management to set prices, compare alternative production methods, set production activity level, close production lines, and choose which of a range of potential products to manufacture. It is useful in decision making about fixation of selling price, export decision and make or buy decision.

There are different types of marginal costs, including
*Marginal social costs
*Marginal private costs
*Marginal external costs
Marginal costing

Marginal-cost pricing

Marginal cost is the cost of producing one additional unit of an industry's output, other things remaining the same. If the price of all units sold is set equal to the marginal cost, the customer will pay an amount that adequately reflects the cost to society of producing the product.

Marginal cost pricing is the practice of setting the price of a product at or slightly above the variable cost to produce it. In economics, it is the practice of setting the price of a product to equal the extra cost of producing an extra unit of output.

By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor.

Economists have espoused that pricing goods and services at marginal cost is efficient both allocatively and productively.

Advantages of marginal-cost pricing
*Simple pricing method and easy to implement
*Use marginal cost pricing to gain entry into a market
*Help to smooth fluctuations in demand.
*Good way to remain in business and price-competitive in a time of difficult trading
Marginal-cost pricing