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Example 2 from July to December 2014 Examiner Report
The following data is available on the production and sales for the first three years of a company’s new product.
Year 1 Year 2 Year 3
Production units 5,000 6,000 4,000
Sales units 4,000 6,000 5,000
Variable costs per unit, selling price and total fixed costs per year were constant over the three-year period. The
company is considering the use of either marginal or absorption costing.
Which of the following statements is/are true?
(1) Absorption costing will show a lower profit than marginal costing in Year 1
(2) Marginal costing will show a lower closing inventory valuation than absorption costing in Year 2
(3) Total profit over the three-year period will be the same under both methodsPlease provide the explanation and answer to this.
The examiners report gives an answer and an explanation!!!
1. In year 1 they produce more that they sell. Therefore the level of inventory increases, and therefore (as I explain in my free lectures) the absorption profit is higher than the marginal profit.
2. The value of inventory when using marginal costing only includes variable costs. When using absorption costing it also includes fixed costs.
3. Over the entire 3 years the total production is equal to the total sales. Therefore the inventory does not change, and therefore the total profit is the same using either method.
All of this is explained in my free lectures. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Hey
If you don’t mind can you please tell me where you got this pastpaper from?
The ACCA does not release past exam papers for Paper MA (and anyway, everyone gets a different exam because the computer selects questions at random from a large bank of questions).
As is written in the first line of the original post, the question is from the examiners report for July to December 2014.
The examiners report always has two or three questions from the exams, and is on the ACCA website.
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