The examples in both lectures on absorption and marginal costing is giving us the selling price, hence allowing us to calculate the profit. Q1 and Q5 does not give us the selling price, so how can we calculate the profits then come up with the difference between absorption and marginal?

The question does not ask for the profits, it asks what the difference in the profits will be.

As I explain in my free lectures, the difference in the profits will always only be the change in inventory multiplied bu the fixed production overheads per unit.

When do we know we’ve had an over-absorption or under-absorption of overheads? Is it when we have a psitive answer that we get an over-absorption? Also, i know this is a little stupid but, is ‘normal level of activity’ referred to as Sales?

If the actual fixed overheads are more than the amount absorbed, then we have under-absorbed. If the actual fixed overheads are less than the amount absorbed, then we have over absorbed.

The normal level of activity is the level of production used to calculate the overhead absorption rate.

As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in the inventory multiplied by the fixed production over heads per unit.

In this question, the fact that there was no opening inventory is irrelevant because whatever the opening inventory had been then the fact that they produced 17,500 units but only sold 15,000 units means that the inventory would have increased by 2,500 units. So the answer would still be the same.

on a third thought I think opening inventory is very rrelevant…… in the example of given, for example, February had a production of 9000 units but sold 11000 units. what guarantee would show a 2000 opening inventory had it not been a January scenario. and the fact that they mention no opening inventory i this case shows that an opening inventory option is possible.

If they produce 2,500 units more than they sell, then the inventory must increase by 2,500 units!!

Of course it is possible for there to be opening inventory, but if there was then the closing inventory would still be 2,500 more than the opening inventory and this is all that matters.

When calculating profit using marginal method, we exclude fixed cost, why is that we are multiplying the fixed cost rate by the difference of closing Inventory to get Marginal profit?

However with marginal costing we do not exclude fixed cost when arriving at the profit – we subtract the fixed cost from the contribution in order to arrive at the profit.

Also, the difference between the absorption profit and the marginal profit is always only the change in inventory multiplied by the fixed cost per unit.

All of this is explained in the free lectures. Did you watch them before attempting this test?

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piszton says

Dear John,

The examples in both lectures on absorption and marginal costing is giving us the selling price, hence allowing us to calculate the profit.

Q1 and Q5 does not give us the selling price, so how can we calculate the profits then come up with the difference between absorption and marginal?

Thank you

John Moffat says

The question does not ask for the profits, it asks what the difference in the profits will be.

As I explain in my free lectures, the difference in the profits will always only be the change in inventory multiplied bu the fixed production overheads per unit.

piszton says

Thank you

John Moffat says

You are welcome 🙂

safashaikh19 says

When do we know we’ve had an over-absorption or under-absorption of overheads? Is it when we have a psitive answer that we get an over-absorption?

Also, i know this is a little stupid but, is ‘normal level of activity’ referred to as Sales?

John Moffat says

If the actual fixed overheads are more than the amount absorbed, then we have under-absorbed. If the actual fixed overheads are less than the amount absorbed, then we have over absorbed.

The normal level of activity is the level of production used to calculate the overhead absorption rate.

Have you watched my free lectures on this?

safashaikh19 says

Yes sir. Thank you very much!

smurts says

Hi. Johns. How would the solution (for question 4) been, had there been opening inventory. cheers

John Moffat says

As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in the inventory multiplied by the fixed production over heads per unit.

In this question, the fact that there was no opening inventory is irrelevant because whatever the opening inventory had been then the fact that they produced 17,500 units but only sold 15,000 units means that the inventory would have increased by 2,500 units. So the answer would still be the same.

smurts says

you are right. many thanks.

John Moffat says

You are welcome 🙂

smurts says

on a third thought I think opening inventory is very rrelevant…… in the example of given, for example, February had a production of 9000 units but sold 11000 units. what guarantee would show a 2000 opening inventory had it not been a January scenario. and the fact that they mention no opening inventory i this case shows that an opening inventory option is possible.

John Moffat says

If they produce 2,500 units more than they sell, then the inventory must increase by 2,500 units!!

Of course it is possible for there to be opening inventory, but if there was then the closing inventory would still be 2,500 more than the opening inventory and this is all that matters.

Please watch the lecture again 🙂

Gabriel says

When calculating profit using marginal method, we exclude fixed cost, why is that we are multiplying the fixed cost rate by the difference of closing Inventory to get Marginal profit?

John Moffat says

I don’t know which question you are referring to.

However with marginal costing we do not exclude fixed cost when arriving at the profit – we subtract the fixed cost from the contribution in order to arrive at the profit.

Also, the difference between the absorption profit and the marginal profit is always only the change in inventory multiplied by the fixed cost per unit.

All of this is explained in the free lectures. Did you watch them before attempting this test?