Difficulty in Classifying Costs in Marginal Costing

Steps:

• Define marginal costing as a technique that treats only variable costs as product costs, ignoring fixed costs.
• Identify key limitation: accurate separation of fixed and variable costs is challenging in practice.
• Evaluate options: A assumes varying contribution (false, it's constant); B misstates inventory stability; C confuses with absorption costing issues.
• Select D as it directly addresses the classification challenge.

Why D is correct:

• Marginal costing relies on dividing all costs into fixed (unchanged by output) and variable (proportional to output), but many costs are semi-variable, making subjective allocation difficult and subjective.

Why the others are wrong:

• A: Contribution per unit remains constant per unit output in marginal costing, as it excludes fixed costs.
• B: Marginal costing values inventory at variable cost only, leading to more stable per-unit values than absorption costing's inclusion of fixed overheads.
• C: Over- or under-recovery of overheads occurs in absorption costing due to fixed overhead allocation, not marginal costing.

Final answer: D