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Last month a manufacturing company’s profit was $2,000, calculated under the 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 unit?
Answer 12,500 units
Sir John, I don’t understand how there is $3000 loss under marginal costing Shouldn’t it be a profit since production units are higher than sales units.
Can you please clarify
Thank you
As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in inventory multiplied by the fixed production cost per unit.
If inventory increases then absorption gives the higher profit. If inventory decreases then marginal gives the higher profit.
Here, the change in inventory is 5,000/2 = 2,500 units.
The absorption profit is higher and therefore the inventory has increased.Therefore they produced 2,500 more units than they sold.
Again, this is all explained in detail in my free lectures 🙂
Sir John, I re-watched the lecturers, just let me know if my understanding is correct
Question 1
Opening inventory 16,500
Closing inventory 18,000
Change in inventory 1500Fixed production overhead rate is $10
Profit using absorption costing is $40,000
What is profit using marginal costing
1500 x $10 = $15,000
$40,000 – $15,000 = $25000Question 2
Opening inventory 18,000
Closing inventory 16,500
Change in inventory 1500Fixed production overhead rate is $10
Profit using absorption costing is $40,000
What is profit using marginal costing
1500 x $10 = $15,000
$40,000 + $15,000 = $55,000Sir can you clarify this one too
Question 1
Production 18,000
Sales 16,500
Change in inventory 1500Fixed production overhead rate is $10
Profit using absorption costing is $40,000
What is profit using marginal costing
1500 x $10 = $15,000
$40,000 – $15,000 = $25,000Question 2
Production 16,500
Sales 18,000
Change in inventory 1500Fixed production overhead rate is $10
Profit using absorption costing is $40,000
What is profit using marginal costing
1500 x $10 = $15,000
$40,000 +$15,000 = $55,000
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