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Marginal Costing as a
Management
Accounting Tool
THIS ARTICLE IS A REPRINT OF CHAPTER 0 IN THE 11TH EDITION OF THE GERMAN
TEXTBOOK, FLEXIBLE PLANKOSTENRECHNUNG UND DECKUNGSBEITRAGSRECHNUNG,
AND IS USED WITH THE PUBLISHER’S PERMISSION. HERE IS THE PUBLISHING
0.1 MARGINAL COSTING AS A COSTING last 50 years. During this time, however, the demands
SYS T E M placed on costing systems by cost management require-
This book,1 on the current state of standard costing, ments have changed radically. For this reason, we first
focuses on the methodology of Marginal Costing. Mar- need to look at how Marginal Costing is currently inte-
ginal Costing1B is a type of flexible standard costing grated into management accounting.
that separates fixed costs from proportional costs in rela-
tion to the output quantity of the objects.2 In particular, 0 . 2 T H E T R A N S F O R M AT I O N OF
apportioning the capacity costs to the individual EFFICIENT USE OF MARGINAL COSTING
processes. Kaplan proposes using the planned or sched- 1. An empirical study in Germany found that Marginal
uled capacity (the actual capacity provided).91 Follow- Costing is used by 49% of small companies, 65% of
ing E. Gutenberg’s distinction between idle-capacity mid-sized companies, and 61% of large companies and
cost and used-capacity cost, this enables an extension of that 42% of all companies use marginal costs in short-
process costing variance analysis to include idle-capacity term operational accounting.99 These results show that
analysis.92 Brühl calls for a distinction to be made here Marginal Costing is being used at a higher rate than
between fixed and variable process costs and that, with that measured by earlier studies,100 although the study
the latter, a further differentiation by resources of dif- also indicates that more than half of all companies sur-
ferent volume-adjustment capability be undertaken in veyed are costing with full costs at the same time and
order to provide a clear breakdown of the capacity uti- are thus deploying Marginal Costing as a parallel cost-
lization variances.93 In contrast, the U.S. approach starts ing system.101 Marginal Costing has thus retained its
from costs that do not vary directly with the operating dominant position in German-speaking countries, being
level and attempts to analyze the cost pool in a way that employed chiefly in its conventional application area of
provides useful information on the cost drivers.94 Both production, and continues to have great significance as
this approach and Brühl’s, however, assume that only a basic core methodology for planning and control of
one process per cost pool or cost center95 is possible. costs generally. Indirect activity areas continue to be
The correct application of this methodology depends pervaded by the Marginal Costing approach, but this is
on the interpretation of idle-capacity costs. If process usually accompanied by convergence with the princi-
costing is primarily seen as a tool for measuring the ples of process costing. This widespread usage of Mar-
usage of resources,96 then the interpretation is much ginal Costing seems to support the conclusion that it
less challenging!97 As early as 1965, W. Lücke proposed still effectively supports companies’ goals in practice.
using idle-capacity costs as a measure for capacity har- The question arises, however, as to how a flexible stan-
monization and optimizing idle-capacity costs in the dard costing system should be designed to ensure maxi-
case of bottlenecks to establish product mix.98 mum efficiency.
But the meaningfulness of reported idle-capacity 2. Internationally, and particularly in the United
costs is viewed here no less critically. With an appropri- States, standard costing was never very highly developed.
ate design of resource-driver-based allocation, the idle Consequently, modern cost management—and especially
capacity can be quantified directly in time and quantity. ABC—has moved toward a new cost accounting
This also appears to be easier for management to inter- approach as a replacement for standard costing. In the
pret. If, however, one wants to measure the costs of the United States, activity-based costing has often been able
different cost center outputs (the effect of current to make the costs of support activities transparent for the
resources on profitability revealed by this approach is an first time, including support activities in production.
argument in its favor), then it would be better to report 3. In contrast, German-speaking countries had by
unused capacity explicitly rather than simply allocating the 1960s already implemented a cost accounting
it to process/activity output. approach that ensured significantly more transparency
In conclusion, we have seen that process costing and for planning and control of costs in the different depart-
Marginal Costing are fully complementary approaches to ments. The Marginal Costing approach developed by
cost management. The use of cost allocation methodolo- H.G. Plaut and W. Kilger is based not only on a particu-
gies that go beyond those of Marginal Costing requires, lar methodology but, as a cost-accounting reporting sys-
however, a new interpretation of the reported costs. This tem, includes a variety of conceptual provisions. The
requirement becomes even more significant the more theoretical-methodological rationale for these provisions
closely the Marginal Costing elements of an integrated continues to hold its validity. Yet practice has not always
cost accounting solution adhere to the theoretical basis. followed theory in every detail. The current tendency is