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Absorption costing

This topic has 1 reply, 2 voices, and was last updated 3 months ago by John Moffat.

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March 31, 2022 at 2:14 pm #652421
pinkyjovin123
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Hello sir

Please help with the below question

S.P. $35 per unit
Direct materials $20
Direct labour $ 4
Variable overhead $1
Fixed overhead $6

Production was 50000 units and sales 60000 units .Opening inventory was 25000 units .The profit calculated using marginal costing was $180000.

What was the profit using absorption costing??

Answer is $120000
March 31, 2022 at 3:00 pm #652429
John Moffat
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As I explain in my free lectures, the only difference ever between the marginal profit and the absorption profit is the change in inventory over the period multiplied by the fixed overheads per unit.

Here, the inventory is decreasing by 10,000 units over the period. Therefore the absorption profit is 10,000 x $6 = $60,000 lower than the marginal profit and so is $120,000.

I do suggest that you watch my free lectures. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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