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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?
Absorption costing profit/(loss) Marginal costing profit/(loss)
Month 1 Month 2 Month 1 Month 2
$ $ $ $
? 200 4,400 (400) 3,200
? (400) 4,400 200 3,200
? 200 3,200 (400) 4,400
? (400) 3,200 200 4,400This question is not asking you to calculate what the actual profits are (that is not possible because there is not enough information). It is asking which set of profits is consistent (i.e. possible) with the information.
I assume that you have watched my free lectures on marginal and absorption costing, in which case you will now that the only reason for the two profits being different is due to the change in the inventory over the period.
In month 1 the inventory increases (because they produce more than they sell) and so the absorption profit will be more than the marginal profit.
In both 2 the inventory decreases (because they sell more than they produce) and therefore the absorption profit will be less than the marginal profit.In only one of the four choices does the above happen 🙂
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