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

Budgeted fixed production overhead is $120,000 and budgeted production is 20,000 units. In a month, production was 18,000 units and sales were 17,000 units, with no opening inventory. Actual fixed overhead equalled budget. The absorption costing profit was $85,000. What was the marginal costing profit?

Marginal costing profit is $79,000. The absorption rate is $6 per unit, and inventory rose by 1,000 units, so absorption costing deferred $6,000 of fixed overhead. Marginal costing profit is therefore $6,000 lower than the absorption costing profit of $85,000.

  1. A$79,000Correct
  2. B$91,000
  3. C$85,000
  4. D$67,000

Explanation

The absorption rate is $120,000/20,000 = $6 per unit. Inventory rose by 1,000 units, so $6,000 of fixed overhead is deferred under absorption costing. Marginal profit = $85,000 - $6,000 = $79,000. The $91,000 option adds the difference instead of subtracting it.

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