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A company manufactures and sells a single product. In two consecutive months the following levels of production and sales (in units) occurred:
Month 1 Month 2
Sales 3,800 4,400
Production 3,900 4,200
The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month using both absorption and marginal costing principles.13. Which of the following combination of profits and losses for the two months is consistent with the above data?
Absorption costing profit/(loss) Marginal costing profit/(loss)
Month 1 Month 2 Month 1 Month 2
$
A. 200 4,400 (400) 3,200
B. (400) 4,400 200 3,200
C. 200 3,200 (400) 4,400
D. (400) 3,200 200 4,400can someone explain me this whole question
As I explain in my free lectures, if sales are less than production (as in month 1) the the inventory will increase and so absorption costing will give the higher profit. If sales are more than production (as in month 2) then inventory will decrease and so marginal will give the higher profit.
This question is not asking you to calculate the profits (that is not possible on the information given) but is asking which set of profits are consistent (i.e. possible) and only one of the sets of profits fits in with what I have written in my first paragraph.
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THANK YOU
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