Key Principles of Marginal Costing

Steps:

• Recall that marginal costing treats variable costs as product costs and fixed costs as period costs.
• Verify statement 1: Contribution equals sales revenue minus all variable costs (production, selling, etc.), per standard definition.
• Verify statement 2: Marginal costing requires classifying all costs as either fixed or variable.
• Verify statement 3: Variable costs encompass direct materials, labor, overheads, and variable selling expenses.

Why A is correct:

• All three statements align with marginal costing definitions: contribution formula (sales - variable costs), binary cost classification, and inclusion of variable selling in variable costs.

Why the others are wrong:

• B excludes 3, but variable costs include variable selling expenses.
• C excludes 2, but costs must be classified as fixed or variable.
• D excludes 1, but contribution is precisely sales revenue minus variable costs.

Final answer: A