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A company uses absorption costing. In a period 34,000 units of company’s single product were manufactured and 33,000 units were sold.
Consider the following two statements:
1 ) fixed production overheads would be over absorbed.
2) profit would be higher than in the previous period.
Are the statements true in relation to the situation described or is it not possible to determine whether or not they are true?Statement 1. Statement 2
A) cannot be determine. Cannot be determine
B) cannot be determine. True
C) True. Cannot be determine
D) True. TrueAbsorption is to do with manufacturing, not sales. Each unit dropping off the end of the production line will have fixed overheads included in its total absorption cost at a predetermined rate (the fixed overhead absorption rate). If more units are made than budgeted then the overheads will be over-absorbed. If fewer than budgeted are made then there will be under-absorption.
So, we cannot tell anything about statement 1: we know what was produced but have no idea whether this was below budget, on budget or above budget.
Profit = sales – cost of sales – expenses. We have no information at all about what happened in the previous period so there is no way of saying profit is higher or lower this period.
Answer = A
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I think it’s
B) cannot be determine. TrueWhy do you think Statement ” is true? Statement 2 says:
“profit would be higher than in the previous period”
If you can say that then it implies you know what happened last period and I can’t see any information in the question about that. For example, exactly the same production and sales might have occurred in the previous period, so presumably the results then would be the same as this period.
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