Define marginal costing.

Marginal costing is a costing method that focuses on variable costs associated with production. It evaluates how changes in production volume affect costs and profitability by emphasizing the costs that vary with the level of output. This approach is particularly useful for decision-making regarding pricing, product mix, and profitability since it ignores fixed costs when assessing the contribution margin of products.

The rationale behind choosing this method revolves around its practical application in scenarios where decisions need to be made quickly based on the incremental cost and revenue of producing one more unit. By concentrating on variable costs, businesses can identify the impact of changes in production levels on overall profitability, leading to more informed strategic decisions.

While it is true that marginal costing can sometimes be used alongside financial reporting, it is not primarily aimed at meeting external financial reporting standards, which typically require a more comprehensive approach that includes both variable and fixed costs as seen in absorption costing. Thus, while other options may mention aspects of costing, only the focus on variable costs for decision-making accurately captures the essence of marginal costing.