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Sir for over/under-absorption I understand everything. But one thing I am curious about is that if there is closing inventory during the year for a company using absorption costing and there is over/under-absorption during the year, there will obv be over or undervalued closing inventory. If i am correct how do we treat that problem?
This has nothing at all to do with unrealised gains or losses – they are a financial accounts problem and Paper F5 is not financial accounts.
As for as the over or under absorption of overheads is concerned, this is adjust for separately in the profit statement.
My free lectures on marginal and absorption costing explain this and illustrate it with an example (and I cannot type out all the lectures here!!)Do watch the lectures – they are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.
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