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A company manufactures 10,000 units of a product per month. During April 11,000 units were sold and the opening inventory for the month was 3,000 units. The costs per unit of the product are as follows:
$ per unit
Direct costs 10.00
Fixed production overhead 4.50
Fixed non-production overhead 3.00By what amount will the profit differ depending on whether marginal or absorption costing is used?
Explanation
Absorption costing Marginal costing
$ $
Opening inventory 43500 30000
Production 145000 100000
188500 130000
Less: Closing inventory 29000 20000
159500 110000
Production overhead 45000
155000
159,500 – 155,000 = $4,500In the marginal costing section – Why isn’t the fixed production overhead(45000)subtracted?
I do suggest that you watch my free lectures on marginal and absorption costing, because as I explain in the lectures the only difference ever between the marginal and absorption profits is the change in inventory multiplied by the fixed production overheads.
Here the inventory decreases by 1,000 units and therefore the difference in profits is 1,000 x $4.50 = $4,500.
I explain why this is the case in my lectures.
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