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a company manufactures and sells a single product. In two consecutive months the following levels of production and sales (in unit) occurred:
month 1 month 2
sales 3,800 4,400
production 3,900 4,200opening inventory for month 1 was 400 units. Profits or losses have been calculated for each other month using both absorption and marginal costing principles
which of the following combinations of profits and losses for the two is consistent with the above data?
ANSWER:
absorption costing profits/ losses marginal costing profit/ losses
month 1 month 2 month 1 month 2
$ $ $ $
200 3200 (400) (4400)please kindly explain, how to come up with this answer
Thank you.The question does not require you to calculate the profits (which is not possible anyway because there is not information).
Instead, it asks which of the answers is consistent with the data and that means which of the answers is possible.
You will know from my free lectures that if inventories increase (because the produce more than the sell) as happens in month 1, then absorption costing will give the higher profit. If inventories decrease (because they sell more than they produce) which happens in month 2, then marginal will give the higher profit.
Only one of the available choices agrees with that 🙂
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