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M plc makes a single product which has a budgeted production cost of $38. This includes a fixed cost of $6 per unit based upon budgeted production of 15,000 units per month. In October actual production was 9,000 units and Sales were 10,500 units. The actual profit for the period was $44,000 prepared on a Marginal Costing basis. What would the profit be if the statement was prepared using Absorption Costing?
A $35000 B $40000 C $45000 D $30000The only difference ever between the marginal and absorption profits is the change in inventory multiplied by the fixed production cost per unit.
During the month, the inventory will have fallen by 1,500 units and therefore the profits will be different by 1,500 x $6 = $9,000.
Given that the production is lower than the sales, the absorption profit will $9,000 lower than the marginal profit.
I do explain this in my free lectures on absorption and marginal costing. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Why do we multiply it with 6??
Shouldn’t we multiply it with Overhead absorption rate per unit??$6 is the fixed overhead per unit and is therefore the overhead absorption rate.
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