Which of the following decision choices are valid in relation to marginal costing?

(A) Costing 'special' or 'one-off opportunity.

(B) Deciding whether to make or buy a product.

(C) Most appropriate technique because of the application of more automation in the industry.

(D) Choosing between competing alternative actions.

(E) Employing a penetration or destroyer pricing strategy.

Choose the correct answer from the options given below:

The correct answer is (A), (B), (D) and (E) only

Key PointsMarginal Costing is a costing system where products or services and inventories are valued at variable costs only. It does not take into consideration of fixed costs. This system of costing is also known as direct costing as only direct costs form part of product and inventory costs. Costs are classified on the basis of the behavior of cost (i.e. fixed and variable) rather than functions as done in the absorption costing method.

Additional InformationCharacteristics of Marginal Costing:

• All elements of cost are classified into fixed and variable components. Semi-variable costs are also analyzed into fixed and variable elements.
• The marginal or variable costs (as direct material, direct labor, and variable factory overheads) are treated as the cost of the product.
• Under marginal costing, the value of finished goods and work–in–progress is also comprised only of marginal costs. Variable selling and distribution are excluded from valuing these inventories. Fixed costs are not considered for the valuation of closing stock of finished goods and closing WIP.
• Fixed costs are treated as period costs and are charged to the profit and loss account for the period for which they are incurred.
• Prices are determined with reference to marginal costs and contribution margin.
• Profitability of departments and products is determined with reference to their contribution margin.