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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.
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 4,400how are we going to solve this question???
The question does not ask you to calculate the profit. It asks which of the profits is consistent with the information (i.e. which set of profits are possible).
In Month 1, production is more than sales and so inventories will increase and therefore the absorption profit will be higher.
In month 2 production is less than sales and so inventories will decrease and therefore marginal profit will be higher.Only one of the choices has absorption higher in month 1 and marginal higher in month 2.
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