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Sales revenue 820000
Variable production costs 300000
Variable selling costs 105000
Fixed production costs 180000
Fixed selling costs 110000
Production 1000
Opening inventory 0
Closing inventory 150Using marginal costing, the profit for June was:
(A) $170,000
(B) $185,750
(C) $197,000
(D) $229,250The answer is A. It is treating entire Variable selling cost as period costs.
My answer was B.
Can you please tell why he did that so? Or is the book wrong?Contribution = revenue less variable cost of 820,000 – 300,000 x 850/1,000 – 105,000 = 460,000
Note 850/1000 is the fraction of production sold.
Profit = contribution less fixed costs = 460,000 – 180,000 – 110,000 = 170,000
Whereas variable production costs are carried forward in closing inventory, selling costs can never be. If an item I in inventory it hasn’t been sold so has not benefitted from any selling costs.
Sir what about other variable overhead like Distribution and Administration? Are they treated same way like we are doing with selling cost above?
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