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A COMPANY USES STANDERD ABSORPTION COSTING. ITS FIXED OVERHEAD ABSORPTION RATE IS $8 PER MACHINE HOUR EACH UNIT OF PRODUCTION SHOULD TAKE 3 MACHINE HOURS. LAST YEAR THERE WAS AN OPENING INVENTORY OF FINISHED GOODS OF 4000 UNITS. THEY PRODUCED 30000 UNITS AND SOLD 25000 UNITS THE ACTUAL PROFIT LAST YEAR WAS $526000
WHAT PROFIT WOULD HAVE BEEN EARNED UNDER A STANDERD MARGINAL COSTING SYSTEM
ACCORDING TO THE ANS GIVEN ITS STATES THAT INVENTORY WAS INCREASED BY 5000 UNITS SO THE PROFIT THERE FOR WILL BE =(24*5000) – (526000) = $406000 MY QUESTION IS WHY THE CHANGE IN INVENTORY LEVEL IS BEEN STATED AS 5000 WHEN THERE WAS AN OPEING INVENTORY OF FINISHED GOODS OF 4000 UNITS AT THE BEGINNING OF THE YEAR WHY ITS NOT STATED AS AN INCREASE OF 1000 UNITS INSTEADPlease do not type in capital letters.
If they produce 30,000 units, but only sell 25,000 units, then the inventory must increase by 5,000 units.
What about it? They have produced 5,000 more units than they have sold, therefore the inventory will increase from 4,000 to 9,000 units.
As you will know from my free lectures, it is the change in the inventory that explains the difference between the marginal and absorption profits.
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