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Effect of inventory levels on absorption costing and marginal costing

Forums › Other Accountancy Qualifications Forums › Effect of inventory levels on absorption costing and marginal costing

  • This topic has 3 replies, 3 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • July 19, 2018 at 12:07 pm #463846
    akshaykopite19
    Member
    • Topics: 17
    • Replies: 13
    • ☆

    If inventory levels decrease, absorption costing will report a lower profit than marginal costing because as well as the fixed overhead incurred, fixed production overhead which had been brought forward in opening inventory is released and is included in cost of sales.

    What does that mean? Can someone help me by giving me an illustration?

    July 19, 2018 at 1:31 pm #463877
    Kim Smith
    Keymaster
    • Topics: 100
    • Replies: 6791
    • ☆☆☆☆☆

    This is just the converse of the statement that if inventory levels increase, absorption costing will report a higher profit than marginal costing.
    Look at the worked example – no opening inventory – closing inventory 60 units (220 – 160) i.e. inventory level has increased. (d) shows that AC is 400 and (e) shows that MC is 280.
    Opening inventory is part of the cost of goods sold (expense) and closing inventory carries forward costs to the next period (asset). If you carry forward more cost than you brought forward profit will increase – if less, profit will decrease.

    July 19, 2018 at 5:14 pm #463952
    akshaykopite19
    Member
    • Topics: 17
    • Replies: 13
    • ☆

    Can you give me a full example with the fixed production overhead? I can’t understand your reply very well.

    Thank you.

    July 19, 2018 at 5:38 pm #463964
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51562
    • ☆☆☆☆☆

    If you watch our free lectures on absorption and marginal costing, then you will see that there is a full example which illustrates what you are asking.

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Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Effect of inventory levels on absorption costing and marginal costing’ is closed to new replies.

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