ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Delta Ltd produced 10,000 units and sold 8,000 units in a period. Fixed production overhead was $50,000 for the period, budgeted output was 10,000 units, and there was no opening inventory. By how much does absorption costing profit differ from marginal costing profit?
Absorption costing profit is $10,000 higher. Inventory increased by 2,000 units, each carrying $5 of fixed production overhead under absorption costing, so $10,000 is deferred to the next period. Marginal costing charges the whole $50,000 to the current period.
- AAbsorption profit is $10,000 higherCorrect
- BAbsorption profit is $10,000 lower
- CAbsorption profit is $40,000 higher
- DProfits are the same
Explanation
Fixed overhead per unit is $50,000 / 10,000 = $5. Inventory rose by 2,000 units, so $10,000 of fixed overhead is carried forward in inventory under absorption costing. This makes absorption profit $10,000 higher. Lower would apply only if inventory fell.
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