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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Which of the following is an advantage of marginal costing compared with absorption costing?

Marginal costing profit is not distorted by inventory changes, because fixed production overheads are charged in full to the period. Profit therefore follows sales volume. Absorption costing, not marginal costing, carries fixed overheads in inventory and complies with IAS 2 for external reporting.

  1. AClosing inventory is valued to include a share of fixed production overheads
  2. BProfit is not affected by changes in inventory levels when sales volume is constant, so profit moves with salesCorrect
  3. CIt complies with IAS 2 for external financial reporting
  4. DIt spreads fixed overheads across units to give a full cost per unit

Explanation

Under marginal costing fixed overheads are written off in the period, so profit depends on sales volume and contribution rather than on production and inventory movements. Absorption costing is the method that complies with IAS 2 and includes fixed overheads in inventory, so the other options describe absorption costing.

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