What is the purpose of marginal costing?

The purpose of marginal costing is primarily to analyze how variable costs impact profitability. Marginal costing focuses on the costs that change with the level of production, which are the variable costs. By looking specifically at these costs, businesses can understand the contribution margin – that is, the revenue remaining after variable costs have been deducted. This insight allows businesses to make informed decisions regarding pricing, product mix, and the level of production needed to achieve desired profit levels.

By concentrating on variable costs, marginal costing helps management in decision-making processes, such as assessing the profitability of individual products, making short-term pricing decisions, and evaluating the impact of increasing or decreasing production volumes. This approach emphasizes understanding how costs behave and are critical for internal management purposes, facilitating straightforward assessments of profit margins and operational efficiency.

While other options mention aspects relevant to cost management, they do not align as closely with the primary focus of marginal costing on variable costs and their direct role in profitability analysis. Total cost determination, evaluation of fixed costs, and efficient allocation of indirect costs are more aligned with absorption costing and other costing methods, but do not capture the essence of what marginal costing primarily addresses.