Marginal Costing Principles

Steps:

• Identify key features of marginal costing: treats variable costs as product costs and fixed costs as period costs.
• Evaluate statement 1: typically incorrect if it claims fixed costs are absorbed into inventory, as marginal costing excludes them.
• Evaluate statement 2: correct, as it focuses on excluding fixed costs from inventory valuation.
• Evaluate statement 3: correct, as contribution (sales minus variable costs) drives decisions like break-even.
• Evaluate statement 4: incorrect if it promotes absorption costing over marginal for all scenarios, as marginal suits short-term decisions.

Why C is correct:

• Statements 2 and 3 align with marginal costing definition, where fixed costs are period expenses and contribution = sales - variable costs.

Why the others are wrong:

• A includes 1 (wrong: marginal costing does not absorb fixed costs) and 3.
• B includes 1 (wrong) and 4 (wrong: marginal ignores fixed overhead absorption).
• D includes 4 (wrong: contradicts variable-only product costing).

Final answer: C