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a company uses standard absorption to value inventory. its fixed overhead absorption rate is 12 per labour hour and each unit of production should take four hours. in a recent period where there was no opening inventory of finished goods,20,000 units were produced using 100,000 labour hours. 18,000 units were sold . the actual profit was 464,000.
what profit would have been earned under a standard marginal costing system????In future, please do not simply set test questions in this forum and expect an answer.
You must have an answer in the same book in which you found the question, and so you should say what problem you are having with the answer.The different between absorption and marginal costing profits is always the change in inventory multiplied by the fixed overhead absorption rate per unit.
Here the inventory increased by 20,000 – 18,000 = 2,000.
The standard absorption rate = 4 x $12.Inventory increased and therefore the absorption profit will be higher and the marginal profit lower.
I do suggest that you watch my free lectures on marginal and absorption costing. (Our lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.)
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