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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Karela Ltd produced 10,000 units and sold 8,000 units in its first year. There was no opening inventory. Variable cost is $12 per unit. Fixed production overhead was $50,000 and was absorbed on actual production of 10,000 units. How does absorption costing profit compare with marginal costing profit?

Absorption costing profit is $10,000 higher. Inventory rose by 2,000 units, and each carries $5 of fixed overhead ($50,000 divided by 10,000 units). Absorption costing defers that $10,000 in closing inventory, while marginal costing charges all fixed overhead to the period.

  1. AAbsorption profit is $10,000 higherCorrect
  2. BAbsorption profit is $10,000 lower
  3. CAbsorption profit is $12,500 higher
  4. DThe profits are equal because production equals the budget

Explanation

Fixed overhead per unit is $50,000/10,000 = $5. Closing inventory is 2,000 units, so $10,000 of fixed overhead is carried forward in inventory under absorption costing. Marginal costing writes off the full $50,000, so absorption profit is $10,000 higher. The $12,500 option wrongly uses 2,500 units.

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