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What is marginal cost accounting & why is it important?

Keeping track of marginal cost requires good cost accounting that clearly separates fixed and variable costs. When it is used routinely as part of management accounting, marginal cost can help businesses optimize production volumes and set prices so as to maximize revenues.

What is marginal costing?

It is the costing technique that calculates the costs of each unit produced. What are the benefits of using marginal cost? It is useful in decision making as it provides accurate data for decisions on whether to make or buy a product, whether to shut down or continue production, at what level to produce, etc.

What happens if marginal cost exceeds marginal revenue?

But if marginal cost exceeds marginal revenue, increasing production means lower profits. Marginal cost takes into account the variable costs associated with the added production, such as the need for additional labor and materials. Fixed costs remain the same no matter the level of production, so they are not a factor.

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