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A company manufactures and sells a single product. In two consecutive months the following levels or production and sales (in units) occurred
Month1 Month2
Sales 3,800 4,400
Production 3,900 4,200The opening inventory for month 1 was 400 units. Profit or losses have been calculated for each month using both absorption and marginal costing principles.
Which of the following combination of profit and losses for the two months is consistent with the above data?
The answer is:
Adsorption costing profit/loss Marginal costing profit/loss
Month1 Month2 Month1 Month2
$ $ $ $
200 3,200 (400) 4,400Unfortuntely I can see where the answer is coming from!
Can anybody please point me in the right direction as to solve this with even a brief explanation?
Kind regards
The only ‘someone’ who answers on this forum is me, because I am the Paper F2 tutor 🙂
The important thing about this question is that it does not ask you to calculate the profits (that is not possible with the information provided) but wants to know which profits are consistent (i.e. possible).
If you have watched our free lectures, you will know that if inventories increase over the period then absorption costing gives the higher profit, and if inventories are decreasing then marginal gives the higher profit.
In month 1 they produce more than they sell – so inventory will increase and therefore absorption will give the higher profit. If month 2 they sell more than they produce and therefore inventories will fall and therefore marginal will give the higher profit.
There is only one set of profits which ‘fit’ with the two sentences above 🙂
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