Your right! The Moomba manual shows option 2. I was got option one straight from BEP's documentation of the cluster VSR/Switch. So Moomba factory supports option 2(I updated the original post).

So I am getting that if you are cheap you could cut out the switch in any setup and you would be losing the ability to combine the batteries with the switch(you would have to move a wire form the positive of one battery and connect it to the other manually).