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Hi Mr. Maffot
I’m finding it difficult to arrive at the answer for this question. I understand the fact that production is higher than sales for Month 1, so therefore absorption costing will be higher and vise versa for Month 2.
The correct answer is C. I don’t understand how they got those figures. Please explain this to me.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 4,200The 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 combination 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
$ $ $ $
A 200 4,400 (400) 3,200
B (400) 4,400 200 3,200
C 200 3,200 (400) 4,400
D (400) 3,200 200 4,400The question does not ask for you to calculate the actual profits (and it is not possible to do so because there is not enough information).
Instead the question asks which of the two profits are ‘consistent’ with the information (i.e. which of the two sets of profits is possible).
As you have written, absorption costing will he higher in month 1 and will be lower in month 2. This is only the case in one of the possible answers.
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