Question

4. Explain Marginal Cost price and when it is applied as rationale- particuallrly by NFP hospitals, related to providing and marketing new (or expanding) clinical services to patientsin rurual markets, to promote services... "close to home."

Answer 1

Marginal Cost price means that a product or service is charged only on the basis of variable costs (Direct material, direct labour, variable factory overheads etc.) and the fixed cot is recovered from the excess of contribution. In Marginal costing costs are divided into two types: Variable costs and Fixed costs. In Marginal Costing variable costs are considered to be directly attributable to products and hence products are charged on the basis of variable costs hence lower than when we price them on total cost basis. Fixed costs are considered to be period costs and hence not charged towards product cost.

Various Advantages of Variable costing is :

1. Inclusion of fixed costs increases the costs of products and services and thus in case of Non-Profit Hospitals (whose main objective is to reduce cost for customers) this method is perfect. In case of others also lower costs gives hospital competitve edge and  increase customer base.

2. This method is easy to calculate since it is very difficult to apportion fixed costs into cost per unit and most of the Non-Profit Hospitals do not have good accounting practices.

3. This method is helpful for management to take key decisons like make or buy etc, which is really important for Non-Profit Hospitals since they have limited resources in which they want to help as many as they could.

4. In marginal costing, closing inventory is valued at lower levels than in total costs, which helps to keep profits lower and realistic.