How are variable non-production overheads treated in marginal costing?

How are variable non-production overheads treated in marginal costing?

• A. Included in valuation of inventory and deducted before contribution
• B. Included in valuation of inventory but not deducted before contribution
• C. Excluded from valuation of inventory but deducted before contribution
• D. Excluded from valuation of inventory and deducted after contribution

Answer: (C)

In marginal costing, only variable production costs are included in inventory valuation. All other costs, including variable non-production overheads, are treated as period costs and expensed in the period in which they occur. This means variable non-production overheads are not part of the inventory value, and they reduce profitability by being deducted when you compute contribution. So, you subtract variable costs (both variable production costs and variable non-production overheads) from sales to get contribution. That’s why they’re described as being excluded from inventory valuation but deducted before contribution. For example, if you sell something for 1,000 and there are 600 in variable production costs and 100 in variable non-production overheads, the contribution is 1,000 − (600 + 100) = 300, and the inventory would only include the 600 variable production cost.

In marginal costing, only variable production costs are included in inventory valuation. All other costs, including variable non-production overheads, are treated as period costs and expensed in the period in which they occur. This means variable non-production overheads are not part of the inventory value, and they reduce profitability by being deducted when you compute contribution.

So, you subtract variable costs (both variable production costs and variable non-production overheads) from sales to get contribution. That’s why they’re described as being excluded from inventory valuation but deducted before contribution. For example, if you sell something for 1,000 and there are 600 in variable production costs and 100 in variable non-production overheads, the contribution is 1,000 − (600 + 100) = 300, and the inventory would only include the 600 variable production cost.