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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 4,200
The 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 combinations of profits and losses for the two months is consistent with the
above data?The question is not expecting you to do calculations – there is not enough information to be able to calculate the exact profits.
What the question is asking for is which combination of profits is consistent with the data, i.e. is possible.
You will know from my free lectures that the only difference between the marginal and absorption profits is due to the change in inventory, and that if inventory increases then absorption give the higher profit but if inventory falls then marginal gives the higher profit.
In month 1, inventory is increasing (because they produce more than they sold), so absorption gives the higher profit. In month 2, inventory is decreasing (because the sell more than they produce) and so marginal gives the higher profit.
Only one of the choices available will give this result.
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