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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

A company produced 10,000 units and sold 8,000 units in a period, with no opening inventory. Fixed production overheads were $50,000. Which statement is correct?

Absorption costing profit is $10,000 higher. The fixed overhead rate is $5 per unit, and 2,000 units of inventory build-up carry $10,000 of fixed overhead into the next period, while marginal costing charges all $50,000 to the current period.

  1. AAbsorption costing profit is $10,000 higher than marginal costing profitCorrect
  2. BAbsorption costing profit is $10,000 lower than marginal costing profit
  3. CAbsorption costing profit is $12,500 higher than marginal costing profit
  4. DBoth methods give the same profit

Explanation

The fixed overhead absorption rate is $50,000/10,000 = $5 per unit. Inventory rises by 2,000 units, so $10,000 of fixed overhead is carried forward under absorption costing. Absorption profit is therefore $10,000 higher. Using $12,500 wrongly divides by sales units.

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