Absorption costing & Marginal costing

AAfrina10y ago

Hi & Good Day! I'm having problem solving this particular question, kindly someone please help me out. A company uses standard absorption costing to vale inventory. Its fixed overhead absorption rate is $12 per labour hr & each unit of production should take 4 hrs. In a recent period where there was no opening inventory of finished goods, 20000 units were produced using 100000 labour hrs. 18000 units were sold. The actual profit was $464000. What profit would have been earned under a standard marginal costing system? A. $ 368,000 B. $ 440,000 C. $ 344,000 D. $ 560,000 The answer only states option A as the correct answer, but it gave explanation nor any kind of calculation resulting to the correct answer. I'd really appreciate it someone can show me the correct calculation on receiving the correct answer. Thanks.

SSapana10y ago#1

Hi, I tried my best have a look, Fixed overhead absorption rate per hour= £12 It takes 4 hour to finish 1 unit so 12* 4=£48 per unit Workings, closing inventory=2000 actual profit( from question)=464000 Closing inventory 2000*48=(96000) Profit using marginal system=368000. I think u understand me

AAfrina10y ago#2

Hi Devansu, Thanks so much for your kind help, I've thoroughly understood your calculation. I have another question though regarding Marginal Costing methods. Let me give you an e.g.: The OAR for a certain product T is $4 per machine hr. Each unit of T requires 3 machine hrs. Inventories of product T last period were: Opening inventory 2400 units; Closing inventory 2700 units. Compared with marginal costing profit for the period, what will the absorption costing profit for product T be? The answer is $3600 higher. I got the calculation correct. But here's my prb. We know that when CI (Closing Inventory) > OI (opening inventory), MCP (Marginal Costinng Profit) > ACP (Absorption Costing Profit & vice versa. Over here, the question already stated that CI is higher than OI. So how can ACP be higher than MCP in this case? Pls help.

John MoffatTutor10y ago#3

But we don't know what when closing inventory is higher than opening inventory that marginal costing gives a higher profit!!!! It is the other way round - if inventory increases then absorption gives the higher profit. I really do suggest that you watch our free lectures on this!

AAfrina10y ago#4

thank you sir.

John MoffatTutor10y ago#5

You are welcome :-)