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25,000 units of a company’s single product are produced in a period during which 28,000 units are sold. Opening inventory was 7,000 units. Unit costs of the product are:
$ per unit
Direct costs
16.20
Fixed production overhead
7.60
Fixed non-production overhead
2.90
What is the difference in profit between absorption and marginal costing?
$30,400
$31,500
$42,000
$22,800This is from the MA1 specimen examination on ACCA website, the answer is $22,800.
Can you please explain how this answer was worked as there is no sales price for the unit. I am a bit confused.
You don’t need selling price. The only difference between TAC and MC is that under TAC fixed production overheads (FPO/H) are included in inventory (‘absorbed’) and under MC they are expensed. So if inventory levels are increasing, under TAC more FPO/H will be carried f/wd (in closing inventory) than is b/fwd (in opening inventory) and therefore TAC profit will be less than MC profit. If inventory levels are decreasing – as is the case here – the converse will be true.
So here, inventory is decreasing by 3,000 (25,000 – 28,000) – each unit of inventory under AC includes $7.60 production overhead – so profit will be less by $22,800 (3,000 x $7.60)Compare this with the MC/TAC comparison in the notes (Chapter 5) – you can see that the difference, $2,500, is the 100 units increase in inventory x $25 FPO/H – you don’t need to know selling price to answer this type of question.
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