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CA Intermediate · Cost and Management Accounting · Marginal Costing

Which statement about marginal costing is correct?

Under marginal costing, fixed costs are period costs charged wholly to the profit and loss of the period in which they are incurred. Stock is valued only at variable cost, and contribution equals sales less variable cost.

  1. AFixed costs are included in the valuation of closing stock
  2. BFixed costs are treated as period costs and charged to the profit and loss of the periodCorrect
  3. CContribution is sales minus total cost
  4. DMarginal costing complies with AS 2 for external financial reporting

Explanation

In marginal costing only variable costs are charged to products and stock. Fixed costs are treated as period costs and written off in the period incurred. Contribution is sales minus variable cost, not total cost. AS 2 requires absorption of fixed production overheads in inventory, so marginal costing is not used for external reporting.

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