Which approach would you use if you want to calculate the cost per unit excluding fixed overheads for decision making?

Which approach would you use if you want to calculate the cost per unit excluding fixed overheads for decision making?

• A. Activity-based costing
• B. Standard costing
• C. Marginal costing
• D. Absorption costing

Answer: (C)

Excluding fixed overheads in the unit cost is the hallmark of marginal costing, which focuses on variable costs for short‑term decisions. In marginal costing, only the variable cost per unit is included when calculating the cost for decision making; fixed overheads are treated as period costs and not allocated to individual units. This gives the incremental or contribution cost of producing one more unit, which is exactly what you need when deciding on pricing, special orders, or changes in output, since fixed costs don’t change with the level of activity in the short term. Other methods don’t fit this purpose as neatly. Absorption costing allocates fixed overhead to units, so the unit cost includes fixed costs and isn’t ideal when you want to ignore those costs for incremental decisions. Standard costing uses predefined standard costs (often with fixed overhead included in those costs and variances analyzed later). Activity-based costing allocates overhead via cost drivers, but it still distributes fixed overhead to products rather than excluding it for decision making.

Excluding fixed overheads in the unit cost is the hallmark of marginal costing, which focuses on variable costs for short‑term decisions. In marginal costing, only the variable cost per unit is included when calculating the cost for decision making; fixed overheads are treated as period costs and not allocated to individual units. This gives the incremental or contribution cost of producing one more unit, which is exactly what you need when deciding on pricing, special orders, or changes in output, since fixed costs don’t change with the level of activity in the short term.

Other methods don’t fit this purpose as neatly. Absorption costing allocates fixed overhead to units, so the unit cost includes fixed costs and isn’t ideal when you want to ignore those costs for incremental decisions. Standard costing uses predefined standard costs (often with fixed overhead included in those costs and variances analyzed later). Activity-based costing allocates overhead via cost drivers, but it still distributes fixed overhead to products rather than excluding it for decision making.