Which statement describes a disadvantage of marginal costing?

Which statement describes a disadvantage of marginal costing?

• A. Does not comply with IAS 2; costs must be analysed into fixed and variable parts; fixed costs cannot be ignored in the long run.
• B. It ignores all fixed costs in decision making.
• C. It requires complex allocations of overheads.
• D. It cannot be used for short-term decisions.

Answer: (A)

Marginal costing focuses on variable costs as the cost of producing a unit, with fixed costs treated as period costs rather than product costs. This makes it very useful for short-term decision making, such as choosing between alternatives based on contribution margin. The disadvantage is that it does not comply with IAS 2 for external reporting, because IAS 2 requires fixed production overheads to be included in the cost of inventory. In the long run, fixed costs are real resources that must be covered, and ignoring them in product costing can misstate profitability for decisions that affect long-term capacity or the financial statements. So the idea that marginal costing ignores fixed costs in long-run reporting and isn’t aligned with IAS 2 is the key drawback. The other statements aren’t correct because marginal costing deliberately excludes fixed overheads from unit costs (it doesn’t attempt complex allocations of overheads), and it is particularly useful for short-term decisions rather than unsuitable for them.

Marginal costing focuses on variable costs as the cost of producing a unit, with fixed costs treated as period costs rather than product costs. This makes it very useful for short-term decision making, such as choosing between alternatives based on contribution margin.

The disadvantage is that it does not comply with IAS 2 for external reporting, because IAS 2 requires fixed production overheads to be included in the cost of inventory. In the long run, fixed costs are real resources that must be covered, and ignoring them in product costing can misstate profitability for decisions that affect long-term capacity or the financial statements. So the idea that marginal costing ignores fixed costs in long-run reporting and isn’t aligned with IAS 2 is the key drawback.

The other statements aren’t correct because marginal costing deliberately excludes fixed overheads from unit costs (it doesn’t attempt complex allocations of overheads), and it is particularly useful for short-term decisions rather than unsuitable for them.