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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Which of the following is a recognised advantage of marginal costing over absorption costing for internal management decisions?

Marginal costing profit is unaffected by inventory changes when sales are constant, because fixed production overheads are charged to the period instead of being carried in inventory. Absorption costing values inventory at full cost, and marginal costing still requires costs to be split into fixed and variable.

  1. AProfit is not affected by changes in inventory levels when sales are constant but production variesCorrect
  2. BIt values closing inventory at full production cost, as required for external reporting
  3. CIt spreads fixed production overheads across units so that each product bears a fair share
  4. DIt removes the need to classify costs as fixed or variable

Explanation

Under marginal costing, fixed production overheads are written off in the period, so profit moves with sales volume and not with changes in inventory caused by production levels. Option B and C describe absorption costing features. Option D is wrong because marginal costing depends on splitting costs into fixed and variable.

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