Practical Applications of Marginal Cost

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Marginal costing is an important concept in managerial accounting and economics, which aids businesses in making better operational decisions related to incremental costs and revenue. Let us understand this concept using some real-world examples –

Marginal Costing Usage in Manufacturing
An auto-rickshaw manufacturer uses marginal costing to determine the latvia phone number list profitability of manufacturing one extra unit. The additional expense can be calculated by determining the marginal costs of raw material used, labour, other variable inputs/units, etc. This cost is compared with the increased revenue. Based on this data, you can decide whether it is profitable to manufacture an additional unit or not.

Fixed costs such as rent are not included while computing marginal costs, as they do not change whether you increase or decrease the production volume.

Marginal Costing in the Service Industry
A writing agency can use marginal costing to price additional services it wishes to offer. For this, it will have to determine aspects like wages, transportation, time taken to complete the task, travel expenses, and additional resources required to serve the new client.

You need to add an appropriate markup to assume the optimal billing rate, which can cover the marginal cost and also contribute to fixed overhead expenses such as rent, bills, etc.