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The following budgeted information refers to a manufacturing company for the next period,
units $
Production 14000 Fixed Production cost 63,000
sales 12000 Fixed Selling cost 12,000The normal level of activity is 14000 units per period
using Absorption costing profits for the next period is $36000What would be the profit for the next period using Marginal costing?
A-$25000
B-$27000
C-$45000
D$47000Please do not simply type out test questions and expect to be provided with a full answer. You must have an answer in the same book in which you found the question, so in future ask about whatever it is in the answer that you are not clear about. Then I will explain.
As I explain in my free lectures on this, the only difference ever between marginal and absorption profits is the change in inventory multiplied by the fixed production overheads per unit.
Here, the inventory is increasing by 2,000 units (because they produce 2,000. more than they sell). The fixed overhead absorption rate is $4.50 per unit (63,000/14000).
Therefore the marginal costing profit will be lower than the absorption costing profit (because the inventory increases) by 2,000 x 4.50 = $9,000.
Do watch my free lectures on this. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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