ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Which of the following is a limitation of marginal costing?
A key limitation is that marginal costing values inventory at variable cost only, excluding fixed production overheads. This does not comply with IAS 2, so it cannot be used for external financial statements without adjustment.
- AIt cannot be used for decisions on make-or-buy
- BIt values inventory excluding fixed production overheads, so it does not comply with IAS 2 for financial statementsCorrect
- CIt makes cost-volume-profit analysis impossible
- DIt requires fixed costs to be apportioned to products
Explanation
IAS 2 requires inventory to include a systematic allocation of fixed production overheads, which marginal costing omits. Marginal costing is in fact useful for make-or-buy and CVP analysis, and it avoids apportioning fixed costs.
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