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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

A company uses absorption costing. In a period it produced 12,000 units and sold 10,000 units. Fixed production overheads were $60,000, absorbed on the basis of actual production. There was no opening inventory. By how much does absorption costing profit differ from marginal costing profit, and in which direction?

Absorption costing profit is $10,000 higher. The fixed overhead rate is $5 per unit ($60,000 divided by 12,000), and the 2,000-unit increase in inventory carries $10,000 of fixed overhead forward instead of expensing it, as marginal costing does.

  1. A$10,000 higher under absorption costingCorrect
  2. B$10,000 lower under absorption costing
  3. C$12,000 higher under absorption costing
  4. D$12,000 higher under marginal costing

Explanation

Fixed overhead absorption rate = $60,000 / 12,000 = $5 per unit. Inventory increased by 2,000 units, so $10,000 of fixed overhead is carried forward in inventory under absorption costing. Absorption profit is therefore $10,000 higher. Option C wrongly uses the 2,000 units multiplied by $6.

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