Which statement best describes marginal cost?

Which statement best describes marginal cost?

• A. It includes fixed costs per unit
• B. It includes only direct material
• C. It is the total cost of production
• D. It excludes fixed costs

Answer: (D)

Marginal cost is the extra cost incurred to produce one more unit of output. It is the change in total cost when output increases by one unit, so it mainly reflects the variable costs added by that unit (such as direct materials, direct labor, and variable overhead). Fixed costs, like rent or salaries that do not change with output, do not affect this incremental cost, because they stay the same regardless of how many units are produced. Therefore, marginal cost excludes fixed costs. It’s not the total cost of production, and it isn’t limited to direct materials alone.

Marginal cost is the extra cost incurred to produce one more unit of output. It is the change in total cost when output increases by one unit, so it mainly reflects the variable costs added by that unit (such as direct materials, direct labor, and variable overhead). Fixed costs, like rent or salaries that do not change with output, do not affect this incremental cost, because they stay the same regardless of how many units are produced. Therefore, marginal cost excludes fixed costs. It’s not the total cost of production, and it isn’t limited to direct materials alone.