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A company manufactures and sells a single product. In two consecutive months the following levels of production and sales (in units) occurred:
Month 1 Month 2
Sales 3800 4400
Production 3900 4200The opening inventory for Month 1 was 400units. Profit or Losses have been calculated for each month using both absorption costing and Marginal costing principles.
Which of the following combination of profits and losses for the two months is consistent with the above data?
Ans:
Absorption costing Marginalcosting
Month1 Month2 Month1 Month2
$ $ $ $
200 3200 (400) 4400Please do not simply set test questions and expect an answer. You must have an answer in the same book in which you found the question, and you should ask about whatever it is in the answer that you are not clear about – then I will help you.
This question does not ask you to calculate the profits – there is not enough information to do that. What it asks is which combination is consistent i.e. which combination is possible.
You will know from my free lectures, that if production is higher than sales, then the inventory increases and therefore absorption will give the higher profit. Similarly, if production is lower than sales, then the inventory will decrease and therefore marginal will give the higher profit.
So the answer is whichever shows the higher absorption profit in Month 1 and the higher marginal profit in Month 2.
Sorry sir…
This question was from BPP revision kit mock exam and they have not explained the answer. The only thing given is :
Closing inventory at end of Month 1= opening inventory + production – sales…Sorry for not specifying it before….
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