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A organization makes a single product whose total cost per unit is budgeted to B $12. This includes fixed cost of $1.50 per unit based on a volume of 6000 units per period. In a period, sales volume was 7000 units, the actual profit for the same period, calculated using absorption costing was $56,000. If the profit statement were prepared using marginal costing. Identify the profit for the period.
I do not think this can be solved using the information given as we are not told openint or closing inventory. The different calculations of opening and closing inventory are the only causes of profit differences. If there is no opening/closing inventory the TAC profits and MC profits are the same.
Nor are we told actual fixed costs. However, if we assume zero opening and closing inventory and that budgeted fixed costs = actual fixed costs, we can show this as follows (rather long)
If sales volume is 7,000, the total absorption cost of sales is 7000 x 12 = 84,000. However, there is an over-absorption of fixed costs because 7,000 x 1.50 has been absorbed when only 6,000 x 1.50 is incurred. This amounts to 1,500 (ie 1.50 x 1,000 extra units)
The adjusted ‘true’ costs are therefore 84,000 – 1,500 = 82,500 and revenue must be 82,500 + 56,000 = 138,500.
Using MC: contribution = 138,500 – 7,000 (12 – 1.50) = 65,000
FC = 1.5.x 6000 = 9,000
So profit = 65,000 – 9,000 = 56,000
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