A company uses standard absorption costing to value inventory. Its fixed OAR is $12 per labour hr & each unit of production should take 4 hrs. In a recent period where where there was no opening inventory of finished goods, 20,000 units were produced using 100,000 labour hrs, 18,000 units were sold. The actual profit was $ 464,000.
What profit would have been earned under a standard marginal costing system?
C. $344, 000
The correct answer is A. I wish to know how this question was calculated to result in to answer A pls.
The only difference between the absorption and marginal profits is the change in the inventory multiplied by the fixed overheads per unit.
In this question, the produced 20,000 units and sold 18,000 units. So the inventory increased by 2,000 units.
The fixed overheads per unit at 4 x $12 = $48.
So the profit will be different by 2,000 x $48 = $96,000.
If inventories increase then absorption gives the higher profit (and so marginal gives a lower profit – 96,000 lower)
I do suggest that you watch our free lectures which cover the whole syllabus for ACCA Paper F2 (which includes marginal and absorption costing).
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