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Dear sir,
I just want to confirm something.When there is decrease in inventory, marginal profit increases.
What about inventory valuation? Inventory values become higher or lower?thanks.
Marginal profit does not increase or decrease!!!
What you really mean is that if inventories decrease then the marginal profit will be higher than the absorption profit (and vice versa).
Inventory is valued higher in absorption costing than in marginal costing (which is precisely why the profit differs as written above!).
Budgeted fixed production is $48,000
Budgeted production is 12,000 units
budgeted sales is 11,720 unitsIf the company sues marginal costing principles instead of absorption costing for this month, what would be the effect on budgeted profit?
-In the book, the answer is $1,120 lower.
I do have obtained $1,120 but how would I know that it is higher or lower? What’s the logic behind?You really must watch the lectures and read the notes, because this is explained!!!
If inventory increases then absorption costing gives the higher profit, if inventory falls then marginal costing gives the higher profit.
Here they are producing more than they sell and so inventory is increasing.
1.A company sold 56,000 units for a revenue of $700,000. Finished inventory increased by 4,000 units in the period. Cost for the period were as follows:
-Variable production $3.60
-Fixed production $258,000(absorbed on the actual of units produced)
-Fixed non-production $144,000Using absorption costing, what was the profit for the period?
The answer is $113,000How to obtain the answer?
2.A company with a single product sells more units than it manufactures in a period.
Which of the following correctly describes the use of marginal costing in comparison with absorption in the above situation?The answer is “Profit will be higher; inventory will be lower”
-Could you explain how inventory will be lower?
You really must watch the lectures!!!
1. The difference in profits is always the change in inventory units multiplied by the fixed production costs per unit.
2. With marginal costing the cost per unit does not include fixed production costs and is therefore lower than with absorption costing which does include fixed production costs.
Dear sir,
I do have watched your lectures several times but still has some difficulties to understand the valuation of inventoryCould you explain under which method(marginal or absorption costing) valuation of inventory will be higher or lower?
Thanks.
But I explained in my previous reply – my answer to your second question.
Therefore inventory valuation under absorption costing is always higher whereas inventory valuation under marginal is always lower?
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