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Hi, Could you please help me to solve this question?
Pooh Ltd has opening stock of 6000 units and a closing stock of 3500 units. The profit generated in the period amounted to $125000 using marginal costing. If the fixed overhead absorption rate is $15 per unit, what would be the profit using absorption costing ?
As I explain in my free lectures on absorption and marginal costing, the only difference ever between the marginal profit and the absorption profit is the change in inventory multiplied by the fixed overheads absorption rate.
Here the inventory (we stopped calling it stock many years ago!) decreases by 2,500 units. The absorption rate is $15 per unit.
Therefore the absorption profit will be lower than the marginal profit by 2,500 x $15.