Are fixed production overheads included in inventory under marginal costing?

Are fixed production overheads included in inventory under marginal costing?

• A. Yes
• B. No
• C. Only in certain scenarios
• D. They must be allocated to products

Answer: (B)

Under marginal costing, fixed production overheads are not included in inventory. The focus is on variable costs and the contribution each unit makes. Only variable manufacturing costs are treated as part of the product cost; fixed overheads are treated as period costs and expensed in the period they arise. This approach keeps inventory values linked to costs that vary with production volume. In contrast, absorption costing would allocate fixed overheads to inventory, which is why this question’s correct answer is that fixed production overheads are not included in inventory under marginal costing.

Under marginal costing, fixed production overheads are not included in inventory. The focus is on variable costs and the contribution each unit makes. Only variable manufacturing costs are treated as part of the product cost; fixed overheads are treated as period costs and expensed in the period they arise. This approach keeps inventory values linked to costs that vary with production volume. In contrast, absorption costing would allocate fixed overheads to inventory, which is why this question’s correct answer is that fixed production overheads are not included in inventory under marginal costing.