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Absorption and Marginal costing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Absorption and Marginal costing

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 23, 2020 at 2:14 am #596091
    applessauce
    Member
    • Topics: 85
    • Replies: 65
    • ☆☆

    Example 2
    The following data is available on the production and sales for the first three years of a company’s new product.
    Year 1 Production units 5,000 Sales units 4,000
    Year 2 6,000 6,000
    Year 3 4,000 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 inYear2 (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 3
    The correct answer is D.

    Sir i understood how option(3) was the correct answer but I don’t seem to understand how option (2) is also the correct answer

    the opening inventory for option 2 was 1000
    and the closing inventory was also 1000( 6000(production)+1000(opening inventory)-6000(sales))

    if both inventory levels are the same in year 2 doesn’t that mean that the absorption and marginal profit are equal???

    November 23, 2020 at 10:30 am #596126
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You have misread the statement.

    The absorption and marginal profits in year 2 will indeed be the same. However statement 2 does not mention the profit. It says that the closing inventory value will be lower with marginal costing, and that is true 🙂

    November 24, 2020 at 2:09 pm #596282
    applessauce
    Member
    • Topics: 85
    • Replies: 65
    • ☆☆

    Oh so in general inventory valued under marginal costing is anyways valued at a lower value compared to absorption costing regardless of the change in inventory (because they are asking for cost and not profit)

    So does this mean that for all three years the marginal value in the cost of inventory was lower than absorption costing?

    Please correct me if i am wrong sir
    I’m just wondering whether the inventory under marginal costing is less than absorption costing in all three years

    November 24, 2020 at 4:57 pm #596294
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Inventory values are always lower with marginal costing than with absorption costing, because absorption costing includes fixed production overheads in the valuation whereas marginal costing does not.

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