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Cee Co manufactures 50,000 units during a period but only sells 45,000 units. The company incurred the following costs:
$ per unit
Direct costs 12.00
Fixed production overheads 6.80
Fixed administration overheads 3.20If Cee Co uses marginal costing, what is the difference in profit from using absorption costing?
If you have watched my free lectures on absorption and marginal costing you will know that the only difference ever between the marginal profit and the absorption profit is the change in inventory multiplied by the fixed production overheads per unit.
Here the inventory increases by 50,000 – 45,000 units over the period, and the fixed production overheads are $6.80 per unit. Therefore the difference in the profits is 5,000 x $6.80.
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