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Last month a manufacturing company’s profit was $2,000, calculated using absorption costing principles. If marginal costing principles had been used, a loss of $3,000 would have occurred. The company’s fixed production cost is $2 per unit. Sales last month were 10,000 units.
What was last month’s production in units?
-Could I please have help with this
Thank you.
You will know from my lectures that the difference between the two profits is only ever equal to the change in inventory multiplied by the fixed overheads per unit.
Here the difference between the profits is $5,000. Therefore the inventory must have increased by 5,000/2 = 2,500 units.
Since they sold 10,000 units, they must have produced 10,000 + 2,500 = 12,500 units.
Thank you for your reply.
– Is the fixed production cost per unit mentioned in the question, the same as the fixed overhead cost per unit?
Kind regards,
studentAlso, if its for the same period, how would using two different inventory valuation methods lead to a difference in inventory? is it because the marginal costing only cost of production and closing inventory with marginal production cost, whereas absorption costing uses the full production cost?
Therefore, there will be less gross profit using absorption costing?
kind regards,
studentWe only include production overheads in the value of inventory.
With marginal costing we only include variable production overheads, with absorption costing we include both fixed and variable production overheads.The costing method used affects both the opening and closing inventories. If inventories increase then absorption costing gives a higher profit, whereas if inventories decrease over the period then marginal costing gives a higher profit.
Look again at page 43 of the free lecture notes and do watch again the lectures on this chapter.
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