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Could you please explain me the following question.
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 4,200The 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 4,400The question is not asking you to calculate the profits – that is impossible here because there is not enough information.
Instead it is asking which profits are consistent with the data – i.e. which combination of profits is possible.Assuming that you have watched my free lectures, then you will know that in month 1, the absorption profit will be higher than the marginal profit because they produced more than they sold. In month 2, the marginal profit will be higher than the absorption profit because they sold more than the produced.
This is the case for only one of the 4 choices available.
If you have not watched my lectures on this then do watch them – 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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