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Last month the opening inventory of a company was 2,000 units and the closing inventory was 4,500 units. Using absorption costing this closing inventory was valued at $29,250. Using marginal costing last month’s profit was $25,000 and using absorption costing it was $34,000.
What was the variable production cost per unit last month?
a) $2.90
b) $2.00
c) $4.50
d) $3.60Please, suggest and explain me the correct option.
You must have an answer in the same book in which you found the question. In future, ask what it is in the answer that you are not clear about and then I will help you.
If you have watch my free lectures, then you will know that the only reason ever for the difference between the absorption and marginal cost profits, is the change in inventory multiplied by the fixed overheads per unit.
You know that the inventory increased by 2,500 units and you know that the difference in profits is $9,000. Therefore the fixed overheads per unit are $3.60.Given that the inventory using absorption costing is $29,250, the full cost per unit must be $6.50. Subtract the fixed cost per unit and you have the variable cost per unit 🙂
I do suggest that you watch my free lectures – they are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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