Marginal vs. Absorption Costing Principles

Steps:

• Evaluate statement 1: Marginal cost includes only variable costs, excluding fixed overheads, so it is incorrect.
• Evaluate statement 2: Marginal cost is defined as the change in total cost from producing one additional unit, covering only variable costs, so it is correct.
• Evaluate statement 3: Inventory decrease means sales exceed production; absorption costing allocates more fixed overheads to cost of goods sold (releasing from inventory), reducing profits compared to marginal costing (which expenses fixed costs fully in the period), so it is correct.
• Combine: Statements 2 and 3 are correct, matching option C.

Why C is correct:

• Marginal costing treats fixed costs as period expenses (no inventory absorption), while absorption includes them in unit costs; inventory decrease amplifies this difference per standard accounting formulas for profit variance.

Why the others are wrong:

• A: Includes incorrect statement 1.
• B: Relies solely on false statement 1.
• D: Omits true statement 3.

Final answer: C