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Good day Sir Moffat,
I have a question regarding Marginal and Absorption costing.
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 4,400I believe the correct answer is C, the problem I have is I don’t quite get the process of obtaining the answer.
Thank you in advance! God Bless 🙂
There is not enough information to be able to calculate the exact profits, and that is not required in the question.
If you have watched my free lectures, then you will be aware that if inventories increase (as they do in month 1, because the production is greater than the sales) then absorption costing will give the higher profit. Also, if inventories decrease (as the do in month 2) then marginal will give the higher profit.
In only one of the options available is that the case.
If you have not watched them, then you really should watch my free lectures. They are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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