Which of the following best defines marginal costing?

Marginal costing is primarily focused on variable costs, making it the appropriate choice in this context. This technique emphasizes only those costs that vary with the level of output, meaning it considers direct materials and direct labor as well as variable overheads, which are essential for decision-making regarding production levels and pricing strategies.

In marginal costing, fixed costs are treated as period costs and are not allocated to individual units of product. This simplifies the decision-making process for managers, particularly in short-term scenarios, as they can analyze how changes in production levels impact overall profitability based on variable costs alone. This focus on variable costs allows businesses to assess the contribution margin—the difference between sales revenue and variable costs—which is crucial for understanding the contribution that individual products make towards covering fixed costs and generating profit.

This understanding is essential for businesses when it comes to making pricing, production, and operational decisions in a competitive environment.