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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Brill Co had opening inventory of 2,000 units and closing inventory of 3,500 units in a period. Fixed overhead absorbed was at $5 per unit based on normal activity. Actual fixed overhead was $8,000 above the budgeted $120,000 and actual production was 26,000 units against normal activity of 24,000 units. Marginal costing profit was $41,000. What was the absorption costing profit?

The absorption costing profit is $48,500. Inventory rose by 1,500 units at $5 fixed overhead per unit, deferring $7,500 of cost, so the profit is $7,500 above the marginal costing profit of $41,000. Over- or under-absorption does not change this difference.

  1. A$48,500Correct
  2. B$33,500
  3. C$41,500
  4. D$56,500

Explanation

Inventory rose 1,500 units x $5 = $7,500 extra profit under absorption costing. Absorption profit = $41,000 + $7,500 = $48,500. The over/under absorption adjustment is included in both methods' fixed cost treatment (fixed overhead is fully expensed in the period either way apart from the inventory movement), so it does not alter the difference. $33,500 subtracts instead of adds.

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