Which is an advantage of marginal costing?

• A. It is appropriate for decision making; fixed costs are treated according to their nature; profit depends on sales not production activity levels.
• B. Fixed costs are allocated solely for reporting profits.
• C. It always provides the same profit as full costing.
• D. It is unaffected by changes in demand.

Answer: (A)

The main idea being tested is that marginal costing focuses on contribution to fixed costs and profit by separating fixed costs from the unit cost and using only variable costs to price and decide. This makes it a practical tool for decision making because managers can see how profits will respond to changes in volume, prices, or costs without distortion from fixed cost allocations to inventory. In marginal costing, fixed costs are treated as period costs rather than being absorbed into the product, so reported profits depend on actual sales rather than on how much is produced and stored in inventory. This aligns with decision-making needs: you aim to understand how incremental changes in volume affect contribution and overall profit. The other statements don’t fit this idea: fixed costs aren’t allocated to products under marginal costing, so profits aren’t the same as full costing when inventory levels change, and profits do change with demand because sales volume drives contribution.