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Hello Sir,
I could not understand how to do this question. Can you please explain?Thanks
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 4,200The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month using both absorption and marginal costing principles.
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 4,400I will answer you, but in future if you want me to answer then you should ask in the Ask the Tutor Forum – this forum is for students to help each other.
It is a little bit of a trick question in that it does not ask you to say whether or not the profits given are correct (it is impossible to calculate the profits on the information given). It asks which set of profits are consistent, which means which set of profits are possible.
You will know from the lecture, that if inventories increase (because the production is more than the sales) then absorption gives the higher profit. (And this is happening in month 1).
Also, if inventories fall (because sales are more than production) then marginal gives the higher profit (and this is happening in month 2).
Only one of the combinations fits in with this 🙂Ah ok. Now i understand. Thanks.
And sorry, I thought I posted it in the Ask the tutor forum. Kinda new here.
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