What key aspect is evaluated in marginal costing?

Marginal costing primarily focuses on the variable costs incurred in the production process. This approach allows businesses to determine how the costs of production behave as output levels change. By evaluating only the variable costs, marginal costing helps in making decisions regarding pricing, product discontinuation, and optimizing production levels.

When analyzing marginal costs, fixed costs are not included in the calculations at a specific level of output, as these remain constant regardless of production changes in the short term. This makes marginal costing particularly useful for short-term decision-making, allowing businesses to assess the cost-effectiveness of producing additional units without the influence of fixed costs.

Understanding how variable costs behave—such as direct materials, direct labor, and variable overhead—provides clarity on how these costs contribute to the overall cost of production and how they can impact profitability on an incremental basis. This evaluation is critical for management to make informed operational decisions and optimize their resource allocation.