Marginal vs. Absorption Costing in Decision-Making and Inventory Valuation

Steps:

• Identify marginal costing as focusing on variable costs only, excluding fixed overheads.
• Recognize absorption costing allocates all manufacturing costs, including fixed, to products.
• Compare uses: marginal suits short-term decisions; absorption fits long-term reporting.
• Evaluate scenarios: marginal fails in inventory valuation due to incomplete cost absorption.

Why D is correct:

• Marginal costing excludes fixed overheads from inventory (formula: inventory value = variable cost per unit × units), understating assets and violating accounting standards like IAS 2 requiring full absorption.

Why the others are wrong:

• A: Marginal costing excels in make-or-buy by highlighting variable cost savings, outperforming absorption.
• B: Marginal aids limiting factor analysis by prioritizing contribution margins from scarce resources.
• C: Marginal is ideal for special orders, focusing on incremental variable costs without fixed allocation distortions.

Final answer: D