advantages and disadvantages of cost approach

The discounted after-tax cash flow method values an investment, starting with the amount of money generated. Most of the expenses are neither totally variable nor wholly fixed. The technique of marginal costing can be applied to maximise the profits of a company in the following ways: It is the planning of future operations to attain maximum profit. Cost control can be effected through comparing fixed and variable elements of costs with budgeted costs. Controllable costs can be given prime attention by the management. The cost approach is often used for new construction, too. Third, the cost technique is appropriately used to estimate the cost of building … Relative Profitability – In case a number of products are being manufactured, marginal costing facilitates the study of relative profitability of different products. The appraisal approach is a procedure for determining an asset's value using an appraisal, rather than market transaction pricing. Marginal costing, if applied alone, will not be much use, unless it is combined with other techniques like standard costing and budgetary control. While the cost technique is highly subjective, in these instances the appraiser has few alternatives to guide the market value estimate. Claim for loss of stock – Insurance claim for loss or damage of stock on the basis of such a valuation will be unfavourable to business. Many businesses use cost-benefit analysis to help them prioritize the projects with the best and highest financial returns. 2. On the basis of absorption costing, the offer can’t be accepted, since it will result in a loss. The costs of lease and ownership are studied and the better alternative is adopted after judging and assessing the minimum sacrifice and maximum differential gain through the technique of marginal costing. Helpful to management – It enables the management to start a new line of produc­tion which is advantageous. Thus, for the choice of alternative products and introduction of new products, marginal costing technique is helpful to a great extent. Realistic valuation of stock – In marginal costing stocks of finished goods and work-in-progress are valued at their variable cost only. Marginal costing is the ascertainment of marginal costs and of the effect of changes in volume or type of output by differentiating between fixed costs and variable costs. Complete information not given – It does not explain the reason for increase in production or sales. 10. Disclaimer Copyright, Share Your Knowledge In periods of trade recession, whether the production in the plant is to be suspended temporarily or permanently closed down, can be decided upon after carefully examining the marginal cost structure.

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