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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

A manager argues for using marginal costing to evaluate a short-term special order that would be sold at a price below full cost. Which statement best supports this argument?

Marginal costing supports the argument because it shows the contribution the special order earns. Fixed costs are incurred regardless, so if the price exceeds variable cost the order adds to profit. It does not allocate fixed overheads, and it does not comply with IAS 2 for inventory.

  1. AMarginal costing allocates fixed overheads fairly to the special order
  2. BMarginal costing highlights the contribution the order makes, since fixed costs will be incurred regardless of the orderCorrect
  3. CMarginal costing complies with IAS 2 for inventory valuation
  4. DMarginal costing shows the full cost of the order, including a share of fixed costs

Explanation

For a short-term decision where fixed costs are unchanged, the relevant measure is contribution, which marginal costing shows directly. Options A and D describe absorption costing. Option C is wrong because IAS 2 requires inclusion of production overheads in inventory cost.

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