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- This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
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- January 1, 2019 at 3:52 am #499579
I found this question in the revision kit (BPP Learning Media)
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 5,000Variable 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 methods.a.) 1 only
b.) 2 only
c.) 3 only
d.) 2 and 3My answer to this question was option ‘c’ 3 only, but when I checked the answer, it said the correct answer is option ‘d’ 2 and 3. I chose 3 only because the total profit for the three year period will be the same under both absorption and marginal costing methods, but I feel that statement 2 makes sense, because production was equal to sales in Year 2 and in such cases there is no difference between the marginal and absorption profits. I humbly request for help, to get this confusion sorted.
January 1, 2019 at 1:15 pm #499596The profits will indeed be the same in year 2.
However statement 2 is not referring to the profit – it is referring to the valuation of the inventory. Inventory is valued lower under marginal costing because fixed overheads are not included in the valuation.
January 1, 2019 at 11:02 pm #499623I got it now. Thank you!
January 2, 2019 at 8:34 am #499644You are welcome 🙂
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