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Sir, can you explain the answer to this question.
A company uses standard absorption costing to value inventory. Its fixed overhead absorption rate is
$12 per labour hour and each unit of production should take four hours. In a recent period where there
was no opening inventory of finished goods, 20,000 units were produced using 100,000 labour hours.
18,000 units were sold. The actual profit was $464,000.
What profit would have been earned under a standard marginal costing system?1. $368,000
2. $440,000
3. $344,000
4. $560,000I assume that you will have watched my free lectures and will therefore know that the only difference ever between the marginal and absorption profits is the change in the inventory multiplied by the fixed overheads per unit.
Here, since they produced 20,000 units but only sold 18,000 units, the inventory will increase by 2,000 units.
The fixed overheads per unit are 4 hours x $12 = $48, and therefore the profits will be different by 2,000 x $48 = $96,000.
Since inventories are increasing, the marginal profit will be lower than the absorption profit.
I do explain all of this in my free lectures. They are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Yes, sir, I have watched all the free lectures. I was a little confused here. Thank you very much, sir.
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