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Hi.
I need to know how to solve this problem as I have no idea!!!!
please explain a bit of detail.
regards
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A business reported an absorption costing profit of $45,000 last period. Its inventory
values for the period were as follows:
$
Opening inventory 28,000
Closing inventory 36,400
If the business had used marginal costing, the inventory values would have been as
follows:
$
Opening inventory 16,000
Closing inventory 20,800What would have been the reported profit using marginal costing?
A $41,400
B $48,600
C $57,000
D $60,600Our inventory has increased:
Absorption Costing: Inventory increased by $8400
Marginal Costing: Inventory increased by $4800
Difference: $3600
This $3600, is the fixed overhead that has been absorbed into the inventory under Absorption Costing. This will also be the difference in profits between the two costing methods.
When we use absorption costing, some of the fixed costs for the period are held within the inventory that has been created which reduces the cost of sales and gives us a higher profit.
Absorption Costing Profit is 45000 – 3600 = $41,400 (A)
Increased inventory – > absorption costing profits > marginal costing profits
Decreased Inventory -> marginal costing profits > absorption costing profitsthank you jack.
this was great help.
but i already tookmy paper and such a question did not come. lucky i guess.
but this was bugging me and u have solved my problem. am sure it will help me in ma2 paper.
regards
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