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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

A company uses absorption costing with a fixed production overhead absorption rate of $6 per unit. In a period, production was 10,000 units and sales were 9,000 units. There were no opening inventories. By how much does absorption costing profit differ from marginal costing profit?

Absorption costing profit is $6,000 higher. Inventory rose by 1,000 units, and each unit carries $6 of fixed production overhead into closing inventory under absorption costing, deferring $6,000 of cost, whereas marginal costing writes all fixed overhead off in the period.

  1. A$6,000 higher under absorption costingCorrect
  2. B$6,000 higher under marginal costing
  3. C$9,000 higher under absorption costing
  4. D$54,000 higher under absorption costing

Explanation

Inventory increased by 1,000 units. Under absorption costing, 1,000 x $6 = $6,000 of fixed overhead is carried forward in inventory, so absorption profit is $6,000 higher. Choosing marginal costing as higher reverses the sign of the effect.

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