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Below is the standard cost card for one unit of product K.
$/unit
Selling price 35
Direct materials 20
Direct labour 4
Variable overhead 1
Fixed overhead 6Production was 50,000 units and sales 60,000 units. The opening inventory was 25,000 units. The
profit calculated using marginal costing was $180,000.
What is the profit using absorption costing?$30,000
$120,000
$210,000
$240,000in solution, they have calculated the closing- opening as (15000-25000)x 6
I dont get how they get 15000
Given that the opening inventory was 25,000 and they sold 10,000 more than they produced, the closing inventory must be 15,000 units.
In fact you did not even need to calculate the closing inventory. As I explain in my free lectures, the only difference ever between the marginal profit and the absorption profit is the change in inventory multiplied by the fixed overheads per unit.
Given that they sold 10,000 more than they produced, the inventory must have changed by 10,000 units over the period, and 10,000 x $6 = $60,000 which is the difference in the profit.
yes sir I know the fact we don’t need to calculate the closing inventory but was reviewing the answer to what they have calculated put me thinking how did they work out
Can we calculate the closing inventory like this sir
Opening inventory 25000
(Add) purchases / production 50000
( less) sales -60000Which gives us 15000 units
So can we calculate closing inventory from this manner as well in any absorption or marginal costing question?And will we get the correct closing inventory ultimately?
Yes, you can calculate the closing inventory like that. However, as I explained in my previous reply (and in my free lectures) we do not actually need to know the closing inventory in this question – only the change in inventory over the period.
It is only relevant for questions asking for the absorption profit when we are given the marginal profit (or asking for the marginal profit when we are given the absorption profit).
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