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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
$$$$
(400). 4400. 200. 3200
200. 4400. (400). 3200
(400). 3200. 200. 4400
200. 3200. (400). 4400Sir i read your reply to this question in different forum, and i know when production increases profit is higher in absorption while lower for marginal and same for sales but if sales are higher marginal would give high profit, here what I’m confused about is that you wrote any one of the combination is possible, but i still don’t get it month 1 has high absorption profit while month 2 marginal has high profit, but in the given options month 2 has all figures positive, just month 1, so we can select 2 options? Because both 200 values in month 1 for absorption are positive while for marginal are negative because in month 1 it’s high profit for absorption, month 2 has wrong figures so i think only one possible combination, please correct me if I’m wrong
It seems that maybe you have misread my other post about this.
In month 1 inventory is increasing and therefore absorption will give the higher profit.
In month 2 inventory is decreasing and therefore marginal will give the higher profit.It is only in the 4th option that both occur.
Sir there’s option 2 in that it shows 4400 for month 2 absorption while less for marginal, that means it’s showing profit is less for marginal in month 2 so obviously it’s incorrect, but the only thing i don’t understand is in month 2 why aren’t they showing negative figure for month 2 absorption profit since they’re selling more?
200. 4400. (400). 3200Or it’s not about negative or positive, we basically have to check which figure gives high profit and which low? According to sales and production, right sir? Which is in 4th option both combination occurs
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