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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

In a month, a company had opening inventory of 1,000 units and closing inventory of 1,600 units. Absorption costing profit was $42,000. The fixed production overhead absorption rate was $4 per unit, and rates were the same in both periods. What was the marginal costing profit?

Marginal costing profit is $39,600. Inventory rose by 600 units, so absorption costing deferred 600 x $4 = $2,400 of fixed overhead in closing inventory, making its profit higher. Subtracting this from $42,000 gives the marginal costing profit.

  1. A$39,600Correct
  2. B$44,400
  3. C$37,200
  4. D$46,800

Explanation

Inventory increased by 600 units. Fixed overhead deferred in inventory movement is 600 x $4 = $2,400. Absorption profit exceeds marginal profit by this amount, so marginal profit = $42,000 - $2,400 = $39,600. Adding $2,400 gives $44,400, which reverses the sign.

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