What is the solution for MA1 CBE provided by Open Tuion , Question Number #47
25,000 units of a company’s single product are produced in a period during which 28,000 units are sold. Opening inventory was 7,000 units. Unit costs of the product are:
$ per unit
Direct costs 16.20
Fixed production overhead 7.60
Fixed non-production overhead 2.90
What is the difference in profit between absorption and marginal costing?
i have exam in 1 day, please provide the full solution.
If 25,000 units are produced and 28,000 sold than closing inventory must be 4,000 (3,000 of the 7,000 opening must have been used for sales).
Profit differences between MC and TAC are caused only by fixed costs brought forward or carried forward in inventory. Here, these will be $7.60/unit because non-production costs never go into inventory values.
Opening stock: 7,000 x 7.6 higher value under TAC than under MC = 53,200. TAC would reduce profits because of this.
Closing stock: 4,000 x 7.6 higher value under TAC than under MC = 30,400. TAC would increase profits because of this.
Net difference = 53,200 – 30,400 = 22,800
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