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A fixed predetermined production overhead rate of $10 is used by a business.
Profits calculated for a period were:
Using absorption costing $225200
Using marginal costing $ 248600
Sales volumes in the period were:
Budgeted 50000 units
Actual 51890 units
What was the actual production volume in the period?
A. 47,660 units
B. 49,550 units
C. 52,340 units
D. 54,230 units
please help me with this question
The two profit figures differ because of the overhead content in inventory. If TAC>MC profits, then more overheads are carried forward in inventory instead of being written off (as in MC) so inventory has increased. Here, MC<TAC, so inventory has fallen. It has fallen by (248600 – 225200)/10 = 2,340 units.
Actual sales are 51890, but 2340 of these have come from falling inventory. Therefore, actual prodection is 51890 – 2340 = 49550.