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Morning John and the Open Tuition team,
The following question on Marginal Costing has really confused me:
A business has completed its first year of trading and the following information has been collected from its records.
Variable Cost/ unit:
Manufacturing: $6
Selling & Admin: $0.20Fixed costs
Manufacturing $90,000
Selling & Admin $22,500Production is 75,000 units. Sales were 70,000 units. Selling price was $8 per unit
What is the difference in profit using Marginal Costing for inventory valuation instead of Absorption Costing?
I’m stuck and am uncertain on how to proceed with this question. Could you please help me. Thank you. Gratefully appreciated.
The only difference ever between the profits is the change in inventory multiplied by the fixed production cost per unit. In absorption costing they are included in the inventory valuation, in marginal costing they are not included in the inventory valuations.
On the information you have typed, the fixed production overheads are 90,000/75,000 = $1.20 per unit. The inventory increased by 75,000 – 70,000 = 5,000 units.
Therefore the absorption profit will be higher than the marginal profit by 5,000 x $1.20 = $6,000.I really do suggest that you watch my free lectures on marginal and absorption costing, because this is all explained. (The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.)
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