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Hi sir
A company has the following budgeted costs and revenues: $ per unit
Sales price 50
Variable production cost 18
Fixed production cost 10
In the most recent period, 2,000 units were produced and 1,000 units were sold. Actual sales price, variable production cost per unit and total fixed production costs were all as budgeted. Fixed production costs were over-absorbed by $4,000. There was no opening inventory for the period.
What would be the reduction in profit for the period if the company has used marginal costing rather than absorption costing
A 4,000
B 6,000
C 10,000
D 14,000
In my view,marginal costing=1000*22-2000*10=2000,absorption costing=50*1000-18*1000-10000+4000=16000,so the reduction in profit=14000.But the answer is 10,000The difference in the profits is always (and only) the change in inventories multiplied by the fixed overheads per unit.
There the inventory increases by 1,000 units (2,000 produced and 1,000 sold). The fixed overheads per unit are $10. Therefore the profits will differ by 1,000 x $10 = $10,000.
Since inventory increased. absorption costing gives the higher profit and marginal costing gives the lower profit.What you have done is wrong for several reasons.
The fixed overheads absorbed were 2,000 x 10 = 20,000. Since there was an over-absorption of 4,000 it means that the actual fixed overheads were 16,000.
Therefore the marginal costing profit is a contribution of 1,000 x ($50 – $18) = $32,000 less fixed overheads of $16,000, which gives $16,000.
The absorption costing profit is 1,000 x ($50 – $18 – $10) = $22,000 plus the over-absorption of $4,000, giving $26,000.
However, this approach is unnecessary, and time-consuming (and there is limited time in the exam).I do suggest that you watch our free lectures on this.
Our lectures are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.Why is the absorption costing profit lower than the marginal costing profit when the number of units in inventory reduce during the period?
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