Absorption and Marginal Costing Principles

As I explain in my free lectures, the only difference ever between the absorption and marginal profits is the change in inventory multiplied by the fixed production cost per unit. If inventory increases then absorption gives the higher profit. If inventory decreases then marginal gives the higher profit. Here, the change in inventory is 5,000/2 = 2,500 units. The absorption profit is higher and therefore the inventory has increased. Therefore they produced 2,500 more units than they sold. Again, this is all explained in detail in my free lectures :-)

Sir John, I re-watched the lecturers, just let me know if my understanding is correct Question 1 Opening inventory 16,500 Closing inventory 18,000 Change in inventory 1500 Fixed production overhead rate is $10 Profit using absorption costing is $40,000 What is profit using marginal costing 1500 x $10 = $15,000 $40,000 - $15,000 = $25000 Question 2 Opening inventory 18,000 Closing inventory 16,500 Change in inventory 1500 Fixed production overhead rate is $10 Profit using absorption costing is $40,000 What is profit using marginal costing 1500 x $10 = $15,000 $40,000 + $15,000 = $55,000

Yes, correct.

Sir can you clarify this one too Question 1 Production 18,000 Sales 16,500 Change in inventory 1500 Fixed production overhead rate is $10 Profit using absorption costing is $40,000 What is profit using marginal costing 1500 x $10 = $15,000 $40,000 - $15,000 = $25,000 Question 2 Production 16,500 Sales 18,000 Change in inventory 1500 Fixed production overhead rate is $10 Profit using absorption costing is $40,000 What is profit using marginal costing 1500 x $10 = $15,000 $40,000 +$15,000 = $55,000

They are the same questions - you should be able to check yourself :-)