- July 7, 2018 at 4:01 am
How do you do this question?…..
– A company manufactures and sells a single product. For this month the budgeted fixed production overheads are $48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what would be the effect on the budgeted profit?
A $1,120 higher
B $1,120 lower
C $3,920 higher
D $3,920 lower
– thank youJuly 7, 2018 at 4:07 am
The answer is B and I am confused as why its not A. I’m confused because you do ‘less closing inventory’ for absorption costing when you sold less than you produced. Therefore, that amount should be deducted from the revenue no?
or is it because you deduct the ‘less closing inventory’ from the cost, it actually leads to an increase in profit by that amount?
however with marginal costing, all of the fixed cost is deducted from the revenue as a cost and thats why its smaller?
Is that what they mean by some fixed overheads will be carried forward in the closing inventory value?
-thank youJuly 7, 2018 at 9:44 am
You ‘less closing inventory’ and ‘add opening inventory’.
If they produce more than they sell then inventory is increasing, and if inventory increases then absorption costing gives the higher profit and marginal costing gives the lower profit.
Absorption costing includes fixed overheads in the inventory value, and so since the inventory is increasing less overheads are charged in the current period.
All of this is explained, with examples, in my free lectures.July 7, 2018 at 10:46 pm
I didn’t understand it in the lecture. Could you explain the last bit please?
– ‘since the inventory is increasing less overheads are charged in the current period’
I get that fixed overheads are absorbed per unit and this total cost per unit (cost card) is used to value inventory (positive difference between production and sales).
I still don’t get how marginal costing which does not include fixed overheads in the cost card leads to a higher profit in this case..July 8, 2018 at 6:06 am
If you watch the lectures on marginal and absorption costing again, you will see that in January they produce more than they sell, so inventories increase and absorption costing gives the higher profit. In February, they sell more than they produce, so inventories decrease and marginal costing gives the higher profit.
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